Report No. 299a-PA FilE 1912/14 EconomicMemorandum

on - '* & C.FILES Public Disclosure Authorized

May 10, 1974 Latin America and the CaribbeanRegion

Not for Public Use Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized

Documentof [nternationalBank for Reconstructionand Development InternationalDevelopment Association

This report was preparedfor official use only by the BankGroup. it may not be publishor. quoted or cited without BankGroup authorization. The BankGroup doesnot accept respon- sibility for the accuracyor completenessof the report. CURRENCYEQUIVALENTS

Currency Unit = Guarar1t

Exchange Rate Effective Since 1960 Official Rate - US$1.oo -= 126 Tnis economic memorand= is based on the :findings of a mission to Paraguay from September 6 to 21, 1973, composed of Josefina Vial (Chief of the mis- sion), Jorge Hay (General Economist) and Rolando Arrivillaga (Loan Officer), and of an updating v)isit by Mr. Hay in Febxuary, 1974.

ECONOMICMEMORANDUM ON PARAGUAY

Table of Contents

Page No.

BASIC DATA

SUMMARY AND CONCLUSIONS ...... X - v

I. RECENT ECONOMIC TRENDS...... 1

Population and Employment ...... Income Distribution ...... *..... 1 Growth in Overall Output ...... 2 ...... 6 AgriculturalProduction ...... 7 Policy ...... 9 Colonization...... 10 AgriculturalCredit ...... 11 Public Finances ...... 12

Central Government Finances ...... 12 ConsolidatedPublic Sector ...... 15

DevelopmentFinance Institutions ...... 17 Prices and Wages ...... 18 M-TonetarySituation ...... 21 Balance of Payments ...... 23

II. MEDIUM-TERMECONOMIC OUTLOOK ...... 26

Economic Prospects for 1974 ...... 26 Meditum-TermProspects, 1975-79 ...... 28

Page I of 2 pages

COUNTRY DATA - PARAGUAY

AREA 2 POPUlATIoN DENSITY 406,752 kz 2.4 million (mid-1972) 6 per km2 Rate of Growth: 2.6 (ftom 1960 to 1970) *- per km2 of arable land

2OPULATION CXARACTERISTIcs (1970) HZALTH (1968) Crude Birth Rate (per 1,000) 42-45 Population per physician 1,610 Crude Death Rate (per 1,000) 12-14 Population per hospital bed 470 Infant Mortality (per 1,000 live births)

INCOME DISTRIBUTION (1970) DISTRIBUTION OF LAND OWNERSHIP 7 of national income, higrast quintile 30 7. owned by top 10% of owners lowest quintile *. 7.owned by smallest 107 of owners

ACCESS TO PIPED WATER ACCESS TO ELECTRICITY .of population - urban ., X of population - urban - rural .. - rural

NVTRITION (1970) EDUCATION (1970) Calorie intake as % of requirements 102 Adult literacy rate 7 79 Per capita protein intake 65 Primary school enrollment 7. 93 1/ GNP PER CAPITA in 1972 US $ 315

GROSS NATIONAL PRODUCT IN 1972 ANNUAL RATE OF GROWTH (c. constant prices)

USI$_Mn. % 1962-65 1965-70 1973

GNP at Market Prices 757.9 TOO.o 4.2 4.4 5.9 Gross Domestic Investment 127.3 16.8 9.9 5.2 23.4 Gross National Saving 122.7 16.2 Current Account Balance -2.0 -0.3 Exports of Goods, NFS 106.2 14.0 12.3 4.3 6.4 Imports of Goods, NFS 99.4 13.1 3.6 5.5 39.9

OUTPUT, LABOR FORCE AYD PRODUCTIVITY IN 1970 2/ Value Added Labor Force- V. A. Per Worker 1S$Mln. % mb. 'I.% 7 Agriculture 192.2 32.1 0.385 56.7 486.6 56.6 Industry 146.9 24.5 0.148 21.2 992.6 115.6 Services 259.6 43.4 0.154 22.1 1,685.7 196.2 Unallocated Total/Average 59877 100.0 0.697 100.0 859.0 100.0

GOVERNMENTFINANCE Public Sector Central Governmcnt ( ,.Mln.) , of GDP ¢ MIn.) of GDP 1973 1972 1973 1973 972 1973

Current Receipts 19,053 16.8 15.1 11,423 9.8 9.1 Current Expenditure 1S 501 14.6 12.3 9,218 8.9 7.3 Current Surplus 3,552 2.2 2.8 2,205 7.9 7.8 Capital Expenditures 6,258 5.7 5.0 1,618 2.2 1.3 External Assistance (net) 2,280 3.4 1.9 -42 0.7 *

1 The Per Capita GNP estimate :s at 1972 market prices, calculated by the same conversion technique as the 1972 World Atlas. All other conversions to dollars in this table are at the average exchange rate prevailing during the period covered. 2/ Total labor force; unemployed are allocated to sector of their normal occupation. "Unallocated" consists mainly of unemployed workers seeking their first job.

not available not applicable * negligible Page 2 of 2 pages

COUNTRY DATA - PARAGUAY

MONEY. and PRICES 1968 1969 1970 1971 1972 1973 (Million e outstandinA cnd period)

MLrneyand Quasi Money 9,826 10,981 12,826 14,632 18,090 21.629 3en)C Credit to Public Sector 4,094 4,611 4,514 4,612 5,718 5,635 IA Benk Credit to Private Sector 10,193 12,673 14,465 16,038 17,822 10,726 L

(Percentages or Index Numbers)

Mrney and Quasi Money as % of GDP General Price Index (1964 * 100) /b 109.0 111.5 110.5 116.0 126.7 143.0 Annual percentage changes in: General Price Index 0.6 2.3 -0.9 5.0 9.2 12.9 Bank credit to Public Sector 12.6 -2.1 2.2 24.0 Bank credit to Private Sector 24.3 14.1 10.9 11.1

BALANCE OF PAYMENTS MERCHANDISE EXPORTS (1973)

1967-9 1972 1973 US Mln 7. (Millions US $) Beef 40.4 31.8 Exporta af Goods, NFS 66.2 106.2 151.7 Industrial seeds 12.2 9.6 Imports of Goods, NFS 95.5 99.4 151.8 11.8 9.3 Resource Gap (deficit - -) -29.3 6.8 -0.1 11.6 9.1 Cakes and expellers 7.6 6.0 Interest Payments (net) -4.5 -9.6 -11.1 All other commodities 43.3 34.2 Workers' Remittances - - - Total 126.9 100.0 Other Factor Payments (net) -1.1 -1.5 -1.4 Net Transfers 2.5 2.3 2.5 EXTER21ALDEBT, DECEMBER 31. 1973 Balance on Current Account -32.4 -2.0 -10.1

Direct Foreign Investment 3.5 2.9 5.4 US $ Mln Net MLT Borrowing Public Debt, incl. guaranteed 126.6 Disbursements 26.7 24.8 30.9 Non-Guaranteed Private Debt Amortization () -4.6 -7.1 -10.8 Total outstanding & Disbursed Subtotal 22 .1 T7-7 20 1 Capital Grants 2.6 2.7 3.0 DEBT SERVICE RATIO for 1973- Other Capital (net) 3.6 -10.9 4.0 X Other items n i - Ircrease in Reserves (+) -0.6 10.4 22.4 Public Debt incl. guaranteed 14.4 Non-Guaranteed Private Debt Gross Reserves (end year) . . Total outstanding & Disbursed Net Reserves (end year) 20 2 30.6 53.0

RATF OF EXCaANGE IBRD/IDA LENDING. (March 31. 1974) (Million US S)

Through - 1971 IBRD IDA JS $ 1.00 - ¢126__ 1.00 - US $0.008 Outstanding & Disbursed 13.4 25.5 Undisbursed 3.2 5.1 Since - 1971 Outstanding incl. Undisbursed 16.6 30.6 US $ 1.00 ¢126 1.00 = us $0.008

1/ Ratio of Debt Service to Exports of Goods and Non-Factor Services. la June 1973 ;b Year everage not available

not applicable SUSMARYAND CONCLUSIONS

1. The Paraguayan economy experienced an accelerationin economic growth during 1969-72. During this period, overall output increased at an average rate of 5.3% per annum as comparedwith a 4.37%yearly growth for the decade ending in 1972. Preliminary estimates indicate that GDP grow by a further 5.8% in 1973. In recent years the economy responced quickly to the stimulus provided by rising world demand for `ts export products. The supply response was facilitatedby earlier investments in transportation,official assistance to mechanize agriculture, a-..d the reinforcement of fiscal and credit export incentives. Export earnr,ngsboomed between 1969 and 1973, easing the foreign exchange constraint to growth and helping to boost domes ,ic savings and investment. Although income per head continues to be relatively low (about US$315 in 1972) and its discrioution could stand improverment, the condition of the rural poor appears to have benefitted in recent years from the dynamic nature of the agriculturaland livestock sector.

2. While the strengtheningof external demand .-or Paraguayan products gave considerableimpetus to output growth in the 1970s, increased export prices and world inflationaryconditions broke Paraguay's impressIve record of price stability. The consuner price index, which in the second half of tne 1960s increased at an average annual rate of 1.3%, rose by 5% in 1971, 9% in 1972 and 13% in 1973. Wholesale prices, however, increased faster last year (33%) largely reflecting price rises in internationallytradeable commodi- ties. by mid-1973 a serious inflationary threat appeared imminent. however, a slowing down of foreign exchange reserves accumulationin the second half of the year, accompaniedby determined Government efforts to curb inflation t'aroughfiscal and monetary measures, managed to avert a runaway inflation.

3. Livestock policy is a key issue for the Paraguayan economy s_nce it affects the balance of payments, consumer prices, and overall social and economic development. As part of its overall strategy to restrain inflation, the Government embarked upon a policy of controlling domestic beef prices. To this end, the Government took a series of successivemeasures which by anad large proved to be ineffective in stopping domestic price rises. First, a reduced beef export quota was instituted for 1973. In the second half of 1973 the Government attempted to arrest the increase in beef prices by introducina, beef price controls. These measures failed to achieve the desired objectives and resulted instead in bringing about smuggling of beef abroad a.. tha bfir;. of a black market at home.

4. Since efforts to curb inflation through control o donmes--c;):'c of beef were unsuccessful,the authorities resorted to strict curr:-uwaz pea- ture policies, increased fiscal effort to mop up excess liquidity, and re- strictive credit policies. At the same time, disincentivesto im,,ortsotf luxury consumer goods were maintained while a liberal policy of duty exemrt:-o'rz on imports of capital goods and transport equipment was applied. Goverr-sxmnt incomes policy depressed real wages in urban areas (particularlytaose of public servants), but reai wages in the countrysideincreased rapidly under the influence of rising export prices and labor shortages at harvesting time. T,heimprovement in tne Central Government financial situation in 1973 and the elimainationof the overall fiscal deficit made a major contributionto cooling off the economy.

5. During the period of 1969-72, thxeCentral Government faced the problem or having to check increasing budgetary deficits in the face of declin-.n colleczions from -ts largest single source of revenue--customs duties on imports. Collections from import duties, which in 1969 representec 44/% of total tax receipts, dropped to only one-third in 1972. The reduction in thieshare of import taxes was due to sluggish imports, legal reduction in import duties to discourage smuggling and deterioration in the operations of the Customs Administration. In January 1972 at the CIAP Country Review, the Government stated that it would intensify domestic resource mobilization and agreed to establish revenue targets for 1972 and 1973. The authoritiesem- barked on a number of administrativeand tax reforms which, while failing to i-prove performance in 1972, paved the way to a marked recovery the following year. Current revenues of the Central Government in 1973 increased by 20%, ma:-dlyfrom increased collectionsof import duties which resulted from an upsurge in imports, increases in some tax rates, and improved tax administra- tion. Current expenditures,however, rose by only 7% despite the higher cost of goods. As a result, savings on current account increased from ¢ 842 million (or 0.9% of GDP) in 1972 to 0 2,205 million (1.8% of GDP) in 1973. In the public sector as a whole, public savings rose from 2.2% of GDP to 2.8%.

O. Paraguay's balance of payments experienced a notable change in the 1970s. The combined influences of greater export volumes and improved terms of trade permitted substantial increases in import capacity, the rate of economic growth, and the level of foreign exchange reserves. The resource gap, which averaged US$29.3 million in 1967-69, turned into a US$6.8 million surplus in 1972. Export performance in 1973 continued its impressive record of recent years under the impetus of rising world commodity prices, particu- Larly for beef, totacco, industrial seeds, , essential oils and . Crop production was boosted in 1973 by good weather conditions. As a result, export receipts increased by 47% over the previous year to a total of some US$127.0 million--more than two-and-a-halftimes the 1966-69 average annual level. The net foreign exchange reserves which had already increased during 1971 and 1972, increased by US$22 million in 1973 and reached US$53 million by year-end. The buildup of reserves was primarily made -ossible by an increase in net capital inflow and in spite of a faster growth of imports than of exports.

7. Given the importance of livestock in the economy, the policy the Government pursues with respect to livestockmarketing in 1974 and 1975 will ?lay a decisive role. As previously mentioned, to restrain inflation the aovernment embarked upor.a policy of controllingdomestic beef prices and limiting exports. This policy created market distortions as producers withheld from the market and increased illegal exports to . - iii -

As a result, in February 1974 the Governmenteliminated some of the controls, introduceda beef export tax of ¢ 2,000 per head of cattle to help regulate ranch-gateprices, and set a 220,000 head ceiling on 1974 beef exports. IWhilethese steps have been in the right direction,the Government should consider the removal of remaining controls and, instead, introduce a system by which the allocationof beef for internal and external consumptionwould be determinedby flexible export taxes. This would alleviate inflationary pressures and give the authorities some control over the movement in real wages. The price at the ranch-gatewilL netedto reconcile two opposing objectives: be low enough to discourage fu:

8. The tasks of economic management in 1974 are likely to be compli- cated by the increase in world oil prices. While retail prices for petroleum products showed some increase in 1973, by far the greatest increase took place in February 1974 when average retail prices were doubled. This rise is estimated to have resulted in a first round increase of about 3% in the consumaerprice index, but its impact over the year is likely to be somewhat greater. This increase and the projected price increases for , and other staples, combined with the recent wage increase, may be expected to generate in 1974 an inflationarypressure equal to or somewhat in excess of last year's. Nevertheless, prospects for a continuationof rapid economic growth this year are favorable,provided an increase in investmentwith major emphiasison the commodity-producingsectors takes place. In order for this to rmaterialize,the Governmentwill have to pursue sound economic policies, reasonable fiscal restraint and continue its efforts to hold down inflation to manageable proportions. The growth propellants are likely to be the livestock sector, overall favorable export demand for the country's agricul- tural and forestry products, and the expanded domestic demand from the initiationof the constructionof the Itaipu hydropower complex which will be exporting energy to Brazil.

9. Paraguay's development prospects over the medium-term appear to be pronmising.The Government'sstrategy of inducing growth in the agricultural, livestock and forestry sectors should be conducive to both an acceieration,oL overall growth and to a relative improvementof the income position of the rural population. The potential for further agriculturalgrowth li-s in a number of favorable factors, such as the existence of vast extentionsof unutilizedland, great hydroelectricdevelopment potential,which may be used for processingagricultural and forestry products, and ample world markets for Paraguayanproducts. If private investment is encouraged, the potential for expansion oZ^export earnings is considerable.

10. Tihemaintenance of a high rate of growth of 6-7% of Paraguay's GDP, however, will depend on (a) the public sector's capacity to identily, - iv -

prepare, and execute a steady pipeline of development projects oriented towards the direct support of the commodity-producingsectots, and (b) the implementation of a comprehensive reform of the tax system which would lessen its dependenceon import duties, make it more responsive to the growth of the economy, and assure a further increase in the rate of public savings. In particular, if the country is to take full advantage of the development opportunitiesoffered by the constructionof the Itaipu, Yacireta-Apipeand Corpus hydroelectricplants, a rapid reinforcementof project planning and execution capacity is essential.

11. To achieve the desired growth objectives, imports of goods and services would need to increase from almost US$200 million in 1974 to some US$350-400 million in 1979. Provided the economic environment remains favor- able, Paraguay has the potential to increase its exports of goods and non- factor services from about US$190 million in 1974 to about US$325 million in 1979. Thus, a large proportion of the import bill may be expected to be financed out of increased export earnings. However, an increasing current account deficit would emerge. This deficit has been projected to rise from US$20 million in 1974 to almost US$60 million in 1979.

12. The above trends in the current account imply that in order to achieve its growth objectives and manage its foreign exchange reserves in a manner consonantwith the expected increase in the size of the import bill, Paraguay would need a net capital inflow of about US$40 million per year on the average during 1974-79 as compared with about US$30 million per year in 1967-69. Assuming that about US$45 million direct foreign investment takes place during the period (based on recent experience) and that official sources provide the country with some US$20 million in capital grants, Paraguay would need to assure a net capital inflow of about US$170 million from medium- and long-term loans during 1974-79. Of these needs, some US$15 to US$20 million are likely to be drawn down from loans contracted before December 31, 1973. The remaining US$155 million would have to come from loans to be contracted during 1974-79.

13. In filling the capital requirementsof the public sector at the projected economic growth rates, external lenders should consider the overall financing scenario of the public sector. If in such circumstancesexternal lenders limited their financing to the foreign exchange component of the projectizableportion of public investment, a short-fall of about US$15 million with respect to the country's foreign exchange needs may result. To fill the remaining gap it would be necessary for external lenders to cover, in addition to the foreign exchange component, 20% to 25% on the average of project costs in the form of local currency financing.

14. Paraguay's outstanding and disbursed external public debt, repayable in foreign currency, is projected to increase from about US$127 million in 1973 to about US$300 million in 1979. Despite this increase, the country's - v - debt servicing capacity is expected to improve. The debt-serviceratio is projected to decline from about 14.4% in 1973 to somewhat below 10% in 1979, wnile the capacity to import is expected to increase at a satisfactoryrate (5.5% per year). This result follows from the projected increase in the country's exports, a trend which already ensued in recent years. Given these expectationsand provided sound economic management continues,Paraguay should remain creditworthyfor considerablelong-term borrowing on conventionalterms. Nevertheless,intensive efforts should be made by the Government to restrict short- and medium-term borrowing as much as possible. At the same time, because of poverty and appropriateoverall economic policies, the country should also remain eligible for assistanceon concessionaryterms for a part of its capital requirements.

I. RECENT TRENDS

Population and Employment

1. The population of Paraguay is estimated to have reached a total of about 2.4 million in 1972 of which 1.5 million or nearly two-thirds was rural. On the basis of preliminary 1972 population census results, the growth rate during the decade of 1962-72 was 2.6% annually. This is con- siderably below the previously assumed growth rate of 3.1%. A major factor responsiblefor the lower growth rate was an underestimationof the consider- able emigration to Argentina. Moreover, the widespread belief that the country was undergoing a process of ruralizationwas dispelled by the census results. Population growth in localitieswith 5,000 people and over, which may be classified as urban, proceeded at the rate of 3.3% per annum, while the rest of the population grew at a rate of 2.4%. Nevertheless, this process of urbanizationdoes not appear to have generated serious pressures on urban centers as in the case of many other developing countries.

2. Paraguay's state of economic developmentis such that except for relatively small numbers no truly industrial labor force has emerged. In- dustrial workers over a large expanse continue to retain their rural roots and thus combine a mixed pattern of industrial-agriculturalemployment. This dual form of occupation is largely responsible for the absence of any serious urban unemploymentproblem, although in some instances it has ac- centuated the rural underemploymentproblem. Furthermore,many urban un- employed have migrated to adjacent Argentinawhere jobs are frequently more attractive in terms of income than employment in Paraguay. Lastly, continued availabilityof virgin land as well as the growing job opportunitiesin rural areas in recent years generated by double-croppingand the boom in agriculturalexports have served as escape valves from potential urDan unemployment.

Income Distribution

3. A sample survey of household incomes for 1970 was carried out in Paraguay by the Instituto de Desarrollo Integral y Armonico (IDIA). The survey showed that the bulk of the families was concentratedin the lowest income levels, the situation being particularlycritical in the rural areas. This skewness is easily explainable in an economy where the population is mainly rural and where well over four-fifthsof the farmers may be charac- terized as small farmers, a high proportion of whom are in the subsistence category. The combined results of the 1972 census and the above sample survey of households, give the following comparison of income distribution in Paraguay and selected Latin American countries: - 2 -

Table 1: PERCENTAGESHARE IN TOTAL INCOME GOING TO HOUSEHOLDSBY INCOMELEVEL

Country Lowest Middle Highest Top 20% 60% 20% 5%

Paraguay 3.6 34.8 61.6 30.1

Brazil 3.1 34.8 62.1 32.6

Honduras 3.2 29.3 67.5 36.0

P,exico 4.0 32.0 64.0 36.0

Source: Size Distributionof Income, IBRD, August 1973 for Brazil (Langoni, 1970), Honduras (ECLA, 1967-68) and (Navarrete,1969). For Paraguay the data are based on the IDIA survey and 1972 population census.

No major differences in family income distributionamong the various coun- tries included in the preceding table are evident at the lowest levels. However, Paraguay's highest 5% income families would appear to receive a lower share of total income than in the other countries. The unstable socio- political situationwhich prevailed until the early 1950s did not allow for the accumulationof huge fortunes in the hands of a few.

4. The estimatedper capita GNP for the total population in 1970 was US$260, with US$133 for the rural area and US$476 for the urban area. Since 1970 agriculture in Paraguay has made considerablegains in terms of relative prices in the economy, thus the income differencesbetween urban and rural population have probably narrowed. It is estimated that the per capita GNP of 13% of the population in 1970 was below US$50, and 31% of the population was below US$75. GNP per capita for 1972 is estimated at US$315. This re- presents an increase of roughly 5% in per capita product in real terms. Since most of this increase accrued to agriculture the per capita GNP of the lowest third of the populationprobably increasedsomewhat faster.

Growth in Overall Output

5. GDP in Paraguay has continued to grow steadily at a relatively moderate rate of 4.6% per annum during 1962-72. However, a marked accelerationof growth has taken place in recent years with the annual rate attaining 5.3% on the average for the period 1969-72. During this latter period, the rates of growth of the agriculture,livestock, and forestry sectors have been noticeablyhigher than the average for the decade, and electricity and water have almost doubled their contribution to GDP. The increasing external demand for agricultural, livestock, and forestry products has been the main determinantin the relativelyhigher expansion of these sectors. The initiationof operationsof the Acaray - 3 - hvdroelectric plant and the urbanization works of CORPOSANA(both with IDB financing) have provided the main impetus to the other sectors.

Table 2: GROSS DOMESTICPRODUCr 1962-72

(Annual Percentage Rates of Growth)

1962-72 1970 1971 1972 1969-72

Agri., livestock, forestry 2.9 4.0 3.8 5.1 4.3 Manft., Mining, Const. 5.5 7.9 5.1 6.2 6.4 Electricity & Water 13.3 35.8 22.0 19.0 25.4 Other Services 5.2 5.3 4.4 4.7 4.8

GDP 4.6 6.1 4.6 5.3 5.3

Source: Table 3

6. GDP in 1973 is estimated to have registered a 5.8% growth rate, however, GDY 1/ grew by 9.2%. During 1972, the livestock sector increased its productive capacity by building up herds; in 1973 tne impact is already being felt. This was mainly the result of Government'slivestock developmentpro- grams supported by IDA/IBRD. Among industrial products, the most dynamic during this year appear to have been textiles and lumber. Commerce and finance, the most important components of the services sector are estimated to have expanded at about 6%. Electricity growth is estimated at almost 12%--the first exports to Argentina have started recently.

7. During the period 1967-69, the annual rate of investmenthas averaged approximately 17% of GDP. The investmenltrate has tended to increase and reached a maximum of 19.3% of GDP in 1973. Because of the slower growth in prices for capital goods than for consumption goods, growth of investment in real terms has been even higher. A significant part of capital goods is imported and import prices have lagged behind export prices of Paraguayan goods.

8. According to recorded data, the share of private cone.u).ion in . P increased slowly during 1965-70 but declined drastical1y in 1972-7a. 2/ Private consumptionexcludes smuggled imports of consumption goods arl.there- fore understates the level of private consumption. ?breover, since she vom.t=. of smuggling varies from year to year, the drop in private consuaption in 1972-73 may well have been more apparent than real. Even if higher consump- tion prevailed in 1972-73, the marked increase in the savings race would seem to indicate a clear upward movement in the rate of private savings during the period. The increase in private savings reflects largely the expansiort of livestock inventories in the hands of the ranchers. 1/ GDY is defined as GDP plus terms of trade effect on income. 2/ Private consumption and savings are obtained as residuals. Table 3: GROSS DOMESTICPRODUCT BY SECTOR OF ORIGIN, 1965-72 ANDESTIMATE, 1973

(At Market Prices in Millions of Guaranies)

Current Prices Constant 1972 Pricea Average Average 1965 1967-69 1970 1972 1965 1967-69 1970 1972 19731'/

Goo8dsSec.or 34 085 38 681 51 833 40 119 43,125 47,064 518339891 .\gt 2, 20,51773,395 2,451 22 30,222 33,395 35,198 of whic.- ilvestock (6,445) (6,775) (7,283) (12,380) (10,845) (11,055) (11,476) (12,380) (13,061) forestry (2,239) (2,542) (3,331) (3,926) (3,423) (3,200) (3,683) (3,926) (4,103) Manufacturing & Mining 8,770 10,769 12,581 15,905 11,214 12,939 14,676 15,905 17,018 Construction 1,358 1,839 2,076 2,533 1,454 1,900 2,166 2,533 2,675

Services Sector 25247 31,713 36240 45,061 30,133 36,235 420 4906L 41,628 Electricity & Water 368 532 840 1,321 1,149 1,209 1,222 1,321 1,448 'iransport & Conmunications 2,404 2,786 2,950 3,773 2,788 3,135 3,298 3,773 3,181 Commerce & Finance 12,744 16,110 18,291 22,272 15,190 18,196 20,223 22,272 23,586 General Government 2,148 3,082 3,943 4,596 2,620 3,557 4,518 4,596 5,014 Other Services 7,583 9,203 10,216 13,099 8,386 10,138 11,659 13,099 13,/99

ross Dostic Product 892 65,798 74921 70,252 96,89479,360 87,984 9 _*_394 102,519

11 Estimdte

Source e 1Rank of Paraguay Table 4: EXPENDITURE ON GDP, 1965-73

(In Millions of 1972 Guaranies)

Average 1965 1967-69 1970 1972 1973

GDP at m.p. 70,308 79,456 88,036 96,894 102,577 Net Factor Income from Abroad -731 -945 -1,424 -1,398 -1,436 Gross National Product 69,577 78,511 86,612 95,496 101,141

Exports of Goods and non-Factor Services 9,261 11,050 8,001 13,381 14,238 Imports of Goods and non-Factor Services 11,277 16,178 13,180 12,524 17,527 Resource Gap -2,016 -5,128 -5,179 857 -3,289

Total Available Resources 72,324 84,584 93,215 96,037 105,865

Consumption 61,186 71,303 79,141 79,997 86,071

Investment 11,138 13,280 14,074 16,040 19,794

Gross Domestic Savings 9,122 8,152 8,896 16,897 16,506 Gross National Savings 8,392 7,207 7,472 15,499 15,070

Terms of Trade Adjustment 416 176 1,562 -- 3.263

Gross Domestic Income 70,724 79,632 89>599 96,894 105,840

Percentages of G.lOP Consunption 87.0 89.7 89.9 82.6 83.9 Investtment 15.8 16.7 16.0 16.6 19.3 Gross Domestic Savings 13.0 10.3 10.1 17.4 16.1 Gross National savings 11.9 9.1 8.5 16.0 14.7

Exports of G & NFS 13.2 13.9 9.1 13.8 13.9 Tmports of C & NFS 16.0 20.4 15.0 12.9 17.1 -6-

9. Gross investment in 1973 is estimated to have increased by more than one-fifth in real terms. A major factor in this increase could be attri- buted to a process of rebuilding livestock herds, which had declined appre- ciably in 1967-70. Foreign investment mainly in the agriculturaland live- stock sectors also increased, partly as a result of political uncertaintyin Argentina. Moreover, the excellent performance of exports in 1973 permitted a considerable increase in imports of capital goods, with imports of machinery doubling its 1972 level.

Agriculture

10. Agriculture, including livestock tnd forestry, is the mainstay of the Paraguayan economy, providing a livelihood to over 60% of the population, contributing about one-third of GDP and about 90% of exports. Overall, Paraguay is an agricultural nation and is likely to remain so for the fore- seeable future.

11. The Paraguay River divides the country into two large regions with completely different characteristics: (a) Eastern Paraguay, which is rela- tively humid and heavily populated; and (b) Western Paraguay, known as The , which is relatively arid and sparsely populated. Eastern Paraguay comprises about 16.2 million hectares (40% of the total land and almost 98% of the farms) with good soils which, if properly exploited, could generate significantlyhigher volumes of agricultural exportable production.

12. Area under cultivation in Eastern Paraguay could be expanded ten- fold; however, this would require investing in farm machinery, drainage, and to a lesser extent, irrigation. At present, a major part of the area is being used for extensive cattle raising with the remainder being either minifundia (over 80% of the farms are below 21 hectares) or forests. A recently completed UNDP/FAO survey identified 3.7 million hectares of forest land as commerciallyvaluable timber. However, the forests are not being rationally exploited. If the situation is not corrected it may result in depletion of a major tnatural resource in the country.

13. The Chaco with over 24 million hectares of land (60% of the land and only 2.3% of the farms) has a totally different land tenure structure from that of the Eastern Region. In this western part of the country over 60% of the farms exceed 100 hectares, being dedicated mainly to extensive cattle raising (40% of the herd is in this region). In 1967-70 the herd in this area was adversely affected by prolonged drought conditions. With favorableweather conditionssince, the herd appears to have recovered. Live- stock and, in some areas, crop production could expand considerably in this region provided relatively heavy investments in land clearing, irrigation, and drainage are carried out. Extensive livestock ranching, however, will be tne main land use in most of the Chaco for many years to come since much land has little or no alternative use possibilities. - 7 -

Table 5: DISTRIBUTIONOF FARMS BY SIZE, 1970

(Numberof Farms,

Hectares: .-21 1-10 10-20 21-100 100< Total

Eastern Region 11,513 86,959 40,047 15,350 4,518 158,387

Western Region 374 1,047 33 - 2,370 3,824

Total 11,887 88,006 40,080 15,350 6,888 162,211

% Distribution 7.3 54.3 24.7 9.5 4.2 100.0

Source: 1970 AgriculturalCensus.

AgriculturalProduction

14. As indicated (para. 5), the expansion of the agriculturaland live- stock sector accelerated significantlyin recent years. While in 1962-72 the sector's output grew at an average annual rate of 2.9%, in 1969-72 it in- creased at 4.3% per annum. However, when analyzed on a product by product basis, this expansion appears to have been fairly uneven. Table 6 includes a group of selected products which accounted for about two-thirds of gross value of agriculturaland livestock production in 1967-69 and shows a broad range of growth rates for the various products. The fastest growing products appear to have been soybeans, , and wheat. In the case of soybeans and wheat, the growth has been the result of the grain program supported by AID. Although the program has been a failure in terms of financial results, it managed to increase production significantlyby expanding the area under cultivationof these crops, although yields have declined. Total area under wheat will probably decline in the foreseeablefuture, but by eliminationof land where productivityhas proven to be marginal, yields should increase considerablyand total production may be only slightly reduced from the 1970-71 level. The wheat harvest of 1972 was a total failure due to bad weather conditions. Production of soybeans increased rapidly in the last three years in response to higher world prices and is further expected to increase very rapidly in 1974. With respect to rice, the decline in prices paid to producers has not been large enough to discourageproduction growth, which again in this case is the result of expansion of the area ?l^xe. Although rice is almost exclusively consumed domestically,neighboring coun- tries could supply export markets for this product. In the first quarter of 1973 (latest available information)the price of rice had considerablyre- covered from its 1972 level, as had the prices for all products inclt,dedin Table 6 (even if seasonality is taken into account). plantations almost doubled between 1969 and 1971, thus the increase in production. Being a permanent crop, sugar does not adjust easily to short term price changes. Table 6s PRODUCTIONAND RATES 0F GROWTHFCR SEIECTEDPRODUCTS, 1968 and 1972

%Share in Gross 3-Year Production Average (1000 tons) Annual % Rates of Growth 1968-72 /1 Value of Production 1968 /1 1968 /1 1972 /1 Productiop Producers Prices /4

Wheat 1.1 22.1 30.8 8.7 2.9 Rice 1.0 23.2 42.0 16.o -2.6 5.4 229.0 226.6 -0.5 -1.3 16.4 1,585.5 1,734.8 2.3 4.4 1.5 29.6 28.8 -0.5 2.2 Potatoes,sweet 1.9 122.3 149.1 5.1 2.7 3.1 223.5 250.9 2.9 0.6 m 2.6 19-8 18.8 -1.3 -1.4 Cotton 2.1 32.5 35.7 2.4 4.0 Soybeans 0.7 17.8 104.7 56.o 0.9 1.1 18.3 20.2 2.5 0.0 Sugarcane 3.4 959.5 1A48.3 6.8 -2.4 Coffee 1.3 5.5 4.5 -2.0 0.8 Beef /2 19.4 656.o 695.0 1.9 0.5 M4ilk7§ 4.9 88.o 86.0 -O.r -4.6

/1 Three year average: 1967-69 1968,and 1971-73= 1972. 7T Data for 1967-69and 1970-72,in thousands of heads slaughtered. 73 Data for 1967-69and 1970-72. 70 Lagged one year. Base period 1966-68,end period1970-72.

Source: USDA, MPG, Central Ban<. - 9 -

Decline in prices until the recent past had not discouragedplantation expansion. Moreover, some foreign investors are in the process of starting new planta- tions so that the prospects are for further production increases. Beef data in Table 6 corresponds to slaughteredanimals. The resulting sluggish average annual growth rate of output (1.9% in 1968-72) understatesreal gains in the last three years, as due to drought and disease heavy losses of breeding stock oc- curred in 1967-70. Taking this earlier decline into account it would appear that the sector recovered rapidly in 1970-73.

Livestock Policy

15. Livestock policy is a key issue for the Paraguayan economy since it affects the balance of payments, consumer prices, and overall social and economic development. In the case of the balance of payments, an increase in export proceeds derived from meat and livestock by-products accounted for 70% of the 1972 trade surplus. This surplus of over US$16.0 million was a departure from the deficitary condition which prevailed since 1966. However, the rising prices of livestock products in world markets have presented the Paraguayan authoritieswith a mixed blessing. On the one hand, the rapid rise in world beef prices contributed to strengthen zhe balance of payments; on the other hand, since beef accounts for 15% of the consumer price index, the escalating world meat prices have had serious repercussionson the domestic price level and have been responsible for most of the inflation in the past two years.

16. As part of its overall strategy to restrain inflation, the Govern- ment embarked upon a policy of controllingdomestic beef prices. To this effect, the Government took a series of successive measures which by and large proved to be ineffective in stopping domestic price rises. First, a beef export quota of 220,000 head (25% smaller than the 1972 exports) was institutedfor 1973. Domestic price rises continued, however, even after the quota was met in the first months of the year, as a result of cattle retention in anticipationof the 1974 export season as well as from the decline in the availabilityof inferior cuts and offal sold in the domestic narket as a side-productof beef exports. In the second half of 1973 the Governmentattempted to arrest the increase in beef prices by introducing beef price controls. Ceiling prices were set for the principal cuts ana, in order to force ranchers to deliver beef for the domestic market, the Government passed a decree tying the 1974 export quota to deliveries for domestic consumptionduring the remaining months of the year.

17. The measures failed to achieve the desired objectives and resulted instead in bringing about the birth of a black market for beef. The ranchers were apparently unimpressedwith Government threats to tie exports to domestic deliveries. Furthermore,in its zeal to arrest inflation, the Government set the beef price ceilings at a level barely above the December, 1971. market prices and some 20% below average beef prices in the second quarter of 1973. In tne face of rising export prices, the incentive to retain beef for the 1974 export season was therefore considerablyincreased. - 10 -

18. In February 1974, the Government eliminatedsome of the controls on beef, introduced a beef export tax of 0 1,000 per head of cattle to help regulate ranch-gate prices, and set a 220,000 head ceiling on 1974 beef exports. While these steps have been in the right direction, the Government should consider the removal of the remaining controls and, instead, introduce a system by which the allocation of beef for internal and external consumption would be solely determinedby flexible export taxes.

CoLonizat ion

19. The Instituto de Bienestar Rural (IBR), created in 1963, is re- sponsible for colonizationschemes. In this endeavor the IBR has the mono- poly of state-owned land, which is sold to the new settlers. The proceeds from the sale of land are the main source of financing for the institution. Since its creation, the IBR has settled about 40,000 families. While being successful in distributingstate-owned land, it has failed to incorporate all settlers into the economic and social development of the country. The main constraint to the success of the IBR has been its limited financial, technical, and administrativecapacity to carry out an integral program re- quiring the supply of infrastructure; extension, financial, and legal services.

20. The IBR has failed to grant property titles (35% of the land lacks legal ownership)to the settlers and many of the original settlers have abandoned or transferred the land. This situation has a double negative effect; first, it is not conducive to efficient use of the land; second, it prevents the collectionof property taxes. Moreover, the IBR has not been able to provide the necessary infrastructurein colonizationareas, or tech- nical and financial assistance at adequate levels.

21. Colonizationschemes would need to settle six to seven thousand families per year in order to provide employment opportunities for new entrants into the rural labor force and halt emigration. More families would need to be settled if the existing minifundia problem is to be alle- viated. The IBR spends about US$500 to settle a family, but a minimum of US$2,000 would be required to provide each family of settlers with the on-farm investmentsand infrastructuralservices needed to give them a chance of success. This appears to be totally beyond the IBR's resources. It appears that, to be effective, the colonization program should be re- organized and converted into a joint venture of four institutions: the IBR which would participate as a coordinator, the Ministry of Agriculture and Livestock which would grant technical assistance, the Ministry of Public Works which would be responsible for infrastructure, and the BNF which would supply credit facilities. Basically the program should be oriented to: (a) opening state-owned land for new settlers, (b) consolidating existing settlements, and (c) resolving the problem of non-viable minifundia.

22. The first step for the IBR to take would be to legalize ownership of old settlers. As for new settlers a provisional ownership title should be issued at the time of the settlement. After two years, the farmers' performancewould be assessed and if deemed satisfactory,permanent owner- ship titles should be granted. - 11 -

23. A simultaneouspromotion of agricultural and livestock production of medium and large farms is required in order to expand the taxing capacity of the sector and thus generate resources to finance the colonization pro- gram particularly in its first stages. It should be noted that the ample availability of unused public and private land in Paraguay permits the dis- tribution of bigger units than in other countries' colonization schemes. A solid source of financial resources is needed, however, since to sustain a meaningful colonizationprogram the Government would need to acquire un- used private lands.

Agric4lturalCredit

24. Agriculturalcredit is confrontedwith a difficult situation in Paraguay. The core of the problem lies in the precarious capitalization problems of the financial institutionssupplying long and medium term credit to the sector. The Banco Nacional de Fomento, the main source of agricultural credit, faces serious financial and capitalizationproblems (paragraph37). Its difficultiesare due mainly to 170 large loans in default made under the National Grain Program. Its weak financial position has impaired its ability to meet the rapidly growing needs of the sector.

25. Another agriculturalcredit institution in a poor financial condi- tion is the Credito Agricola de Habilitacion (CAH). Its decapitalization originates in the high risk involved in its operations. CAR lends to very small farmers who would not normally qualify for commercial credit. Since its establishment(1943), CAH has accumulated debts totalling 0 140 million. Its present portfolio is 0 151 million in principal and i 129 million in interest.

26. The only solid credit institution operating in the sector in Paraguay is the Livestock Fund, which started in 1963 as the project unit to administer an IDA credit of US$3.6 million (Credit 47-PA). Subsequently IDA and IBRD financing amounting to US$16.1 million have strengthenedits operations. The institution is now an independentagency of the Central Bank administeredby a coordinatingcommittee composed of a president ap- pointed by the Central Bank, one representativeof the Banco Nacionale de Fomento (BNF) and a technical director. The management of the Fund has been sound and this has reflected itself in high loan recovery and the strong financial position of the institution. The funds from the Third Livestock project are almost fully committed, and there appears to be ample justifica- tion for replenishmentof the Fund's resources.

27. Commercialbank financing of the agriculturalsector is directed almost exclusivelyto larger market-orientedfarmers. A high proportion of commercialbank loans to agricultureis short-term and geared to market- ing operations. High interest rates in the past have been a major consrtrainr for commercialbanks' expansion of lending operations. About three years ago, when the rate of inflation was low, interest rates charged by these banks fluctuated between 11% and 36%, while those charged by the BNF fluc- tuated between 10% and 18%. With accelerating inflatiorn in the last two years, commercial bank rates have declined in real terms. - 12 -

28. Two main conclusionscan be drawn from the situation described above. Firstly, there is an urgent need to strengthen the financialand managerialposition of the institutionsgranting medium and long term credit to agricultureso that they can safely expand their lending operations. Secondly, and connectedwith the preceding conclusion,the need for a revision of interest rates of credit institutionsis called for. As long as inflation persists a mechanismwhich ensures positive interest rates in real terms should be devised, thus protectingthe financialinstitutions from further threats of decapitalization.

PUBLIC FINANCES

Central GovernmentFinances

29. In the period 1969-72 the Central Government faced the problem of having to check increasingoverall budgetary deficits in the face of declin- ing collectionfrom its largest single source of revenue - taxes on imports. Revenues from import duties, which in 1969 accounted for 44% of Government tax revenues, accounted for only one-third in 1972. The reduction in the share of import taxes has been the result of sluggish imports, legal reduction in import duties to discourage smuggling,and deteriorationin the operation of the Customs Administration.

Table 7: ANNUALVARIATIONS IN GOVERNMENTREVENUES AND EXPENDITURES

(Nominal Growth Rates-Percentages)

1969 1970 1971 1972

GovernmentCurrent Revenues 19.5 1.4 1.3 6.4

Import Duties 21.3 -10.7 -3.0 -12.0 Other Revenues 18.1 10.8 4.0 17.1

GovernmentCurrent Expenditures 6.9 -3.1 3.5 12.2

Gross Domestic Product 7.5 6.9 11.8 15.7

Source: Table S.

30. The authoritiessought to reduce overall budgetary deficits through restraint of current and capital spending and through efforts to increase revenues. They succeeded in their endeavor to keep the growth of current expendituresbelow GDP growth rates in current prices during 1969-72. The task of increasingrevenues was much more difficult,however, given the inelasticityof revenues from internal taxes to nominal incomes and the accelerationof price increases. While through the introductionof new revenue measures, changes in tax rates, and administrativeimprovements, - 13 -

Table 8: CGNTRAL GOVMNWT FINANCES 1969-73

(In Millions of Current ,)

Actuals Es imates 1969 1970 1971 1972 1973 Current Revenues 8,676 8,797 8,909 9,478 11,423 of which Import Taxes (3,787) (3,382) (3,279) (2,885) (3,603) Current Expenditures 6,961 7,423 7,686 8,636 9,218

Savi.ngs in Cirrent Account 1,715 1,374 1,223 842 2,205

C'apital Revenies - -- 9 - -

CapitalExpenditures 1348 1S53 1,661 164 1 Direct InvestmentL ,2936 ,00 1650 931 Cap. Trans. to Public Sector 5.99 564 4~68 5 597 a. to non-fin. p.s. (473) (370) (292) (290) b. to fin. p.s. (126) (194) (176) (164) Other Capital ExT.. 30 43 103 60 90

OverlallDeficit (-) - 169 -429 - 1,322 587

.inarning, of the Deficit 133 1696.429 1,322 -587

H., eraiL._ (ne') 395 308 262 643 -42 Loan Utilization / 37 270 27 325 PL 4biC* 31 238 234 118 3 114 DonaItions 23 31 28 25 1 Amnortization () 300 - 297 - 280 - 407 -482

Internal (net) - 262 - 139 167 679 -545 Geatrral Bank (net) L2 5 - 134 12 9 -24 Change in floating debt - 312 - 5 - 245 - 264 -521 a. Payment of past obl. (-) (- 576) (- 427) (- 599) (- 738) b. New DebZt (264) *(422) (354) (474)

/1Z NEstimatesfcr 1973 made on a project by project basis.

/2; nncludes shcrt-term, medium-term.and change in cash balances.

6o0U'cO: Ministry of Finance; Planning Secretariat;IDB and IBRD Staff Estimates. - 14 -

the authoritiesovercame the low built-in elasticityof the tax system and succeededalmost every year in increasingrevenues from internal taxes at a faster rate than nominal output, the growth rate of total revenue collection (includingimport duties) lagged behind the moderate increase in current expenditures. As a result, governmentsavings declined from a peak of 2.4% of GDP in 1969 to 1.5% and 0.9% in 1971 and 1972, respectively.

31. At the CIAP Country Review of January, 1972, the Governmentexpressed its desire to intensifydomestic resource mobilizationefforts and established revenue targets for 1972 and 1973. The authoritiesembarked on a number of administrativeand tax reforms which, while failing to improve performancein 1972, paved the way to a marked recovery the followingyear. Current revenues in 1973 increasedby 20% as a result of a recovery in import duties collections resulting from an upsurge in imports, increases in some tax rates, and improved administrativeperformance. Current expenditures,however, increasedby only 7% despite the higher cost of goods. As a result, savings on current account rose from ¢ 842 million (or 0.9% of GDP) in 1972 to ¢ 2,205 million (1.8% of GDP) in 1973.

32. The impressiveincrease in Governmentsavings in 1973 was possible not only because of the increase in revenues but also because of a considerable loss in purchasingpower of civil servants' salaries. The armed forces have suffered less from inflation,a considerablepart of their income being paid in kind. The increase in the price of food for the armed forces has accounted for about 0 300 million, or one-half of the increase in current Government expenditures. Capital expendituresin 1973 declined to 1.3% of GDP, as com- pared to 2.2% of GDP the previous year. This decline took place as a result of the completionof some lumpy projects as well as the Government'saggregate demand policies. The resultingoverall surplus of 0 587 million helped to ease demand pressures arising from increasedprivate investmentwhile contri- buting to meet the private sector's need for liquiditywithout impairing foreign exchange reserve accumulation. - 15 -

Table 9: CENTRALGOVERNMENT FINANCES

(Percentage Ratios) /1

Actuals Estimate 1969 /2 1970 1971 1972 /3 1973 /4

Saving/Current Revenues 19.8 15.6 13.7 8.9 19.3 Saving/CapitalExpend. 92.8 89.0 73.6 38.9 136.3 Saving/GDP 2.4 r.8 1.5 0.9 1.8 /2 Current Revenue/GDP 12.4 11.7 10.6 9.8 9.1 /2 Overali Surplus/GDP -0.2 -0.2 -0.5 -1.4 0.5 /2 GDP Deflator (Annual % Change) 0.3 0.7 6.9 9.9 22.9 /2

/1 Derived from data in current prices. /2 The introductionof a sales tax increased revenues considerablythis year. /3 A legal reduction in import duties resulted in a sharp fall in duty collectiona. /4 The preliminary estimate of GDP in current prices would appear to over- state the price level. Any overstatementof nominal GDP would result in an understatementof ratios to GDP.

Source: Tables 3 and 8.

ConsolidatedPublic Sector

33. In the overall public sector, excluding public banks, the Central Government has, since 1969, with the exception of 1972, contributedmore to public savings than all the rest of the public entities combined. This de- monstrates the importance of the financial position of the Central Government, which has not only to supply its own needs, but also to cover through transfers the operational deficits of some of the entities as well as contribute to the financing of some of their capital expenditures. The municipalitiestradi- tionally have been able to finance from their own sources both their current and capital expendituresand are expected to continue to do so in trhefuture. Among the decentralizedagencies, the Social Security Institute generates considerable savings, which do not compensate, however, for the deficit of the other agencies in the group (the biggest deficit is produced by rL.e Na- tional University of Asuncion). Public enterprises, the main invevDo; in the public sector, generate considerable savirLgs. These savLngs coae "lors. exclusively from the electricity enterprise (ANDE), and the teiecouaunticatLons company (ANTELCO). These two enterprises have consistently maintained profit- making tariff policies. In contrast, the deficit ridden airlines (LA?) an. railway operation are relatively small, making the burden for the Central Government less critical than in other countries. The UN-IBERDtransport study Table 10: CONSOLIf)ATEDPUBLIC SECTOR

(In Millions of Current )

Actuals Estimate

1969 1970 1971 1972 1973

Current Account Revenues 13,679 14,653 15,105 16,264 19,053 Expenditures 10,868 12,239 12,690 14,155 15,501 Gross Savings 2,811. 2,414 2,45 2,109 3,552

Capital Account Gross Savinigs 2,611 2,414 2,415 2,109 3,552 Capital Revenues 192 561 154 106 300 Capital Expenditures 3,968 3,525 4,070 5,531 6,258 Overall Deficit (-) -965 -550 -1,401 -3,316 -2,406

Financing 965 550 1,401 '1,316 2,406 Net External Einancing 1,374 750 799 1,741 2,280 Loan Disbursements 2,112 1,242 1,576 2,443 Amortizations (-) -783 -552 -818 -755 Donations 45 60 41 53

NTet Internal Financing -409 -200 602 1,575 126 Of which Central Bank (242) (136) (614) (1,209) ( 387)

Source: PDanrming Office, .Iinistry of Firna-vce &nd IBRD staff. - 17 - for Paraguay proposed two possible alternativesfor resolving the railway problem: (1) close down the railway or (2) proceed to adjust tariffs,make limited improvementsand keep it in operation. As for the airline, consider- able tariff increases for domestic flightswere suggestedby the same study as a means of reducing the deficit.

34. Gross savings of the decentralizedpublic sector have systematical- ly financed smaller shares of its capital expenditures (except in 1972) than those of the Central Government. however, the decentralized public sector has been able to count more heavily on external financing. This external financinghas concentratedon ANDE and ANTELCO, the main sources being for- eign governments and the IDB. The 1973 estimated external financing of the decentralized public sector relates to loans already committed or loans whsch were being negotiated in early 1973. Domestic financing of the overall deficit in recent years has come mainly from suppliers' --commercial banks, with Central Bank financing being either small or negative on a net basis.

35. Largely because of the trends evident in Central Government finances, aggregate public sector savings increased from 2.2% of GDP in 1972 to 2.8% of GDP in 1973 while aggregate public investmentdeclined from 5.7% of GDP in 1972 to 5.0% of GDP in 1973. These trends were accompaniedby a relative intensificationof the use of external resources in financing investment expenditures. The share of aggregate public investment financed from external sources increased in 1973 mainly as a result of a slowdown in tha execution of projects not amenable to external financing. Public sector savings fi- nanced some 57% of public investment expendituresin 1973.

Development Finance Institutions

36. The Banco Nacional de Fomento (BNF) is the sole developmentoriented financial institutionof appreciable size which operates in the Paraguayan financial market. The critical capitalizatltonand portfolio management pro- blems of the BNF prevent this institution,under present conditions, from safe- ly expanding its credit operations. The capitalizationproblem has been carried out since its establishment in 1961 as a successor to the Banco del Paraguay whose unsuccessfuloperations resulted in liquidation. At that time the law fixed the amount of authorized capital for the BNF at i 2.1 billion. However, only one-third of the authorized capital was paid in by the Govern- ment and that in the form of the loan portfolio held by the Banco del Paraguay. By the end of 1972 the Government still owed the BNF over 0 118.5 mil.io,n of the initial capital balance.

37. The most financially unsuccessful program executed by thc BiNFin recent years was the National Grain Program. The program's loan portfolio balance and related accumulatedinterest (0 1.86 billion), much of which was in arrears, was transferred to the Paraguayan Government. The failure of this program was the result of a number of concurring factors. It was over-ambitiousin terms of financial and technical capacity as well as inefficientin the selection of borrowers. The areas chosen to carry out - ;8 - the program in many cases were inappropriate to grow wheat and weather con- ditions were most unfavorable in the first two to three years of the program. A substantialpart of the losses incurred in the Grain Program should come from the recovery of loans which are in default by combining debt reschedul- ing and foreclosure.

38. At present the BNF is constantly forced to obtain short-term credits to meet current demands and obligations. Its external debt, medium and long term, by the end of 1972 was 3.6 times the Bank's equity and the cost of debt capital was 91.4% of earnings,with loans delinquent and in default amounting to almost 16% of total pcrtfolio. Moreover, BNF's current liabilitiesof 42,986 million (US$23.7 million) exceeded its current assets of ¢2,644 million (US$21.0 million), including short-term loans, by 13%. The debt service of the BNF for the next five years exceeds B 10 billion. A number of solutions to the BNF problem are being considered. One would be to implement a financial rehabilitationplan under the existing structure aiming at recapitalizingthe BNF in a reasonableperiod of time and improving its management. A second possibilitywould be to break the institution into three independentbanks following the existing departmentaldemarkation of activities: Development department, agriculture and livestock department, and commercialdepartment. 1/ A third possibilitywould be to create a new public development finance institution to compete with the BNF in some lines of credit. This institution would be capitalized with government funds but would divest itself by sales to the private sector. In the short run, the external financial agencies contemplate the possibility of establishing in- dependent funds within the BNF for individual projects, following the pattern of the Central Bank Livestock Fund in which the IBRD participates.

39. The Compania Paraguaya de Desarrollo S.A.. (CONDESA)was founded in 1970 as a private DFC with the support of ADELA and AID. With a paid in capital of $ 126 million up to the end of 1972, it had granted credits for almost f 313 million helping to finance 103 projects in the fields of in- dustry, agricultureand livestock, transport,tourism and pre-investment. While so far COMDESA has not operated boldly along developmental lines it has followed sound financial management techniques and policies and could in the future become a full fledged DFC. Informal contacts for IFC assist- ance have taken place and the possibility of fostering the expansion of COMDESA should not be precluded.

Prices and Wages

40. Paraguay's impressive record of continuous relative price stability suffered a severe setback in the last three years. The Consumer Price Index, which in 1965-70 had increased at an average annual rate of 1.3%, rose in 1971 by 5%, in 1972 by 9.2Z, and by 12.8% in 1973. The trend towards accelerating inflation continues. The Consumer Price Index increased by 8.4% in January 1974 and is expected to show a similarly large increase in February 1974.

1/ The IDB is looking into this matter and granting technical advice. - 19 -

Table 11: CONSUMERPRICE INDEX: MONTULYVARIATIONS, 1971 - 1973

(Percentages)

1971 1973 1973

January -1.7 2.5 2.3 February 5.4 2.4 0.7 March -0.8 -0.1 4.1 April -2.1 -1.0 -0.6 May -0.6 -0.6 -0.6 June 2.7 -0.2 2.2 July 0.6 1.5 1.6 August -0.5 1.8 5.6 September -0.7 0.7 -5.7 October 1.4 0.2 -1.7 November 1.0 - 3.3 December 1.6 2.0 2.5 AVERAGE 5.0 9.2 12.8

Source: Central Bank.

41. The external sector was almost entirely responsiblefor the 1971 price increases and remained an important inflationaryfactor in 1972 and 1973. The prices of Paraguay's main exports went up following improved ex- ternal demand conditionswhile prices of imports increased as world inflation accelerated and the guarani remained pegged to the U.S. dollar through its devaluations. The first round of price increases was mostly reflected in the food component of the Consumer Price Index. External demand led to sub- stantial domestic beef price increases in 1971-73. The ensuing consumer shift to other foodstuffs was confronted with high prices for imported wheat and domestic supply constraints. These factors transferred part of external price pressures to other domesticallyproduced staple foods in 1972 and 1973 (Table 12). While beef prices triggered off the inflationaryprocess, infla- tion appears to have been increasinglyfeeding on itself. Beef price movements accounted for over three fourths of the increase in consumer prices in 1971, but in 1972 and 1973 their share declined steadily while that of otner products increased. - 20)

Tadle 12: IMPACT OF DIFFERENT GROUPSOF CONSUMERGOODS ON THE OONSUNERPRICE INDEX AND ITS FOOD COMPONENT,1971 - FIRST QUARTER1973

(Percentages)

First Quarter 1971 1972 1973 Consumer Food Consumer Food Consumer Food Prices Prices Prices Prices Prices Przces

1. Percentage Points Price Increases 5.0 8.6 9.2 11.1 8.2 15.8 Due to Non-Food Consumer Goods 0.7 - 3.7 - 0.4 - Due to Food Products 4.3 8.6 5.5 t1.1 7.8 15.8 (Beef) (3.8) (7.8) (4.0) (8.0) (2.0) (4.2) (Other Food Products) (0.5) (0.8) (1.5) (1.3) (5.8) (11.6)

2. As Percentage of Total Price Increases 100.0 100.0 100.0 100.0 100.0 100.0 Due to Non-Food Consumer Goods 14.0 - 40.2 - 4.9 - Due to Food Products 86.0 100.0 59.8 100.0 95.1 100.0 (Beef) (76.0) (90.7) (43.5) (72.1) (24.4) (26.6) (Other Food Products)(10.0) (9.3) (16.3) (27.9) (70.7) (73.4)

Source: Central Bank and Mission estimates.

42. The Government based its strategy to curb inflation on efforts to fight beef price increases and on maintaining strict control over real wages, thereby avoiding cost-push pressures which would feed the inflationary pro- cess. Paraguayan labor laws required an automatic revision of minimum wages whenever the Consumer Price Index increases by 10%. Early in 1971 minimum wages were increasedby 10% after a seven-year freeze, but the authorities avoided customary Central Government employees wage increases during that year. In 1972 and 1974 Central Government employees obtained 5% wage rises. Minimum wages were increased by 10% in March 1973 and again by the same amount later in the year. Minimum wages are again due for revision, as the Consumer Price Index has increased by more than 10% since the last adjust- rent.

43. Whiie these actions resulted in an appreciableincrease in nominal wages, price increases forestalledrises in purchasing power. Real wages deciined steadily; in terms of the 1964 consuuer basket, real wages for Asuncior.workers fell by about five percent between 1969 and 1973 (Table 13). The nechanismof minimum wage increases resulted, however, in a somewhat more e>.a_itarian income distribution within the salaried workers category. Flat wage increases computed as a percentage of the minimum wage are usually Zranted to private sector employees whenever the minimum wage is adjusted; -zh-i procedure .has tended to reduce salary differentials. - 21 -

Table 13: REAL WAGES FOR URBAN WORKERS, 1969-73

Asuncion Workers' Consumer Price Urban Real Wages Index Index /1 Wages

Average 1969 100.0 100.0 100.0 Average 1970 103.2 99.1 104.1 Average 1971 107.1 104.0 103.0 June 1972 (111.3) (111.0) (100.3) December 1972 (111.7) (118.0) (94.7) Average 1972 111.5 113.6 98.2 June 1973 (116.0) (127.9) (90.9) December 1973 (126.6) (134.7) (93.9) Average 1973 121.3 128.2 94.6

/1 Based on a 1964 sample.

Source: Central Bank.

44. Although there is no systematic collection of data regarding rural wages real wages in the countryside appear to have increased in the last two-to-three years. Rural incomes are better protected from inflation since an imDortant part is paid in kind. Moreover, with increasing agricultural and l;vestockactivity, severe manpower shortages have developed at the peak of the season. Rural cash wages are reported to have increased in 1973 by as much as 50% in some areas of the country.

}Ionetary Situation

45. The favorable trend of Paraguay'sbalance of payments in the last three years brought about a degree of instability in the country's monetary system. Tne net international reserves of the Central Bank increased ra- pidly in 1971 and 1972. Reserve accumulationcontinued in 1973, when the reserve level increased by US$22 million to a total of US$53 million. Three- fourths of the accumulation of foreign exchange reserves took place in the first six months of the year. The large inflow of foreign exciiangeincucec a swelling of the money supply which, given the rapid increase in prices, caused justified alarm in the monetary authorities.

46. The monetary fears were dispelled in the second half of tae year. Net Central Bank credit to the public sector contractedand credit to the BNE fell i 200 million short of the net advances anticipated at mid-year. The Central Bank, moreover, reduced net credit to the CommercialBaiks. As a result, domestic credit contractedbetween June and December, 1973 and despite a further i 832 million reserve accumulation,currency in circula- tion increased by only i 765 million (Table 14). The relation between high- powered money and GDP declined from 11.9% at the end of 1972 and over 12% at mid-year to 11.6% at the end of 1973. Table 1La: SUNMARYACCOUNTS OF THE CENTRAl,DANK, 1.969-1973

(Millions of (uaranies; erd of perlod)

Jne 196'9 1970 1971 1972 1973 1973

Net International Reserves 1,12 2,179 2,550 3,859 5,851 6,6)3

Domestic Credit 5,567 6,028 6,589 7,677 7,968 7,901 Public Sector, net 4179 862 h 311 5,467 6 00?6 Central Government 2, 1,93 2,251 3,213 33,39 Credit (2,733) (2,753) (3,175) (,209) (,451) (I,1.?7) Debit ( -688) ( -817) ( -924) ( -996) (-1,183) (-1,238) Other Public Entities, net 1,717 1,926 2,060 2,251s 2,231 2,227 Wlheat Conmiission, net 117 1495 391 347 503 -R BNF 263 .473 1, 284 i 58 1 569 11976 Coimmercial Banks 62 2B9 337 211 537 Prior Import Deposits -bL -317 -2 -3 Other Assets, net 13 1,312 5 3

Currency in Circulation 6,691 8,207 9,139 11,536 13,819 lh,581

Bank Notes 3,713 4,320 4,796 5,593 6,865 7,112 Bank Deposits 2,978 3,887 4,343 5,943 6,9514 7,47?

Mmorandum Items

Real growth rate of GDP (% change) 14.3 6.1 4.6 5.3 - 5.8 GDP Deflator (% change) 3.1 0.7 6.9 9.8 - 2,. GDP Current Prices 70,093 71A,921 83,736 96,894 (11.1,b31h) 125,969 Domestic Credit as % GDP 7.9 8.1 7.9 7.9 (7.2) 6.3 Currency in Circulation as % GDP 9.5 11.0 10.9 11.9 (12.A) 11.9

Souarce: Centra3 Bank; IBRD Staff Estimates - 23 -

Balance of Payments

47. Paraguay'sbalance of payments experienceda striking change in the 1970s. The combined influencesof greater export volumes and improved terms of trade permitted substantialincreases in import capacity, the rate of economic growth, and the level of internationalreserves. The resource gap, which averaged US$29.3 million in 1967-69 turned into a US$6.8 million surplus in 1972.

48. Export earnings stagnated during the second half of the 1960s. The main cause for the slowdown was a drop in prices and decline in ship- ments of beef products, although poor performance in forestry products was a contributingfactor. The export ricture improved radically in 1970, when earnings increased by 26% despite a 3% decline in export prices. After remaining almost constant in 1971, export earnings increased by 32% in 1972 to a total of US$86.2 million, mainly as a result of higher shipments. Ex- norts of beef, cotton, industrial seeds, sugar and hides registeredthe greatest increases in earnings.

49. Export performance in 1973 continued its impressiverecord of recent years. During 1973, world commodity prices strengthened,particularly for beef, tobacco, industrialseeds, coffee, essential oils and soybeans. Crop productionwas boosted in 1973 by good weather conditions. As a result, exports increased by 47% over the previous year to a total of some US$127.0 million--morethan two-and-a-halftimes the 1966-69 average annual level.

50. Imports of goods increased at an average annual rate of 12% in 1966-69. The growth of imports was especially strong in capital and in- ternediate goods, reflecting higher investment levels as well as some specu- latory stock building in the later years. In 1969-72 imports remained stagnant,but in 1973 they increasedby almost 50% reflecting an upswing in private investment and world price increases.

51. As many developingcountries, Paraguay benefited in the 1970s from improvementsin the external terms of trade. The most important factor in the sharp reversal of the resource gap has been, however, the in- crease in the volume of goods exported (Table 15). - 2A -

'.bl* 15: E3.PI3CS, iV66-72 IWJ X8S1T1 , 1973

ci, too&.A 0f US Do1ll.ra letri. Tm.; d US .oll4.,. '.r Motrl TSon

1966 1967 968i 1969 1970 1971 1972 1973

LoEizV.1,. 8,533 6,163 5,551 6,317 6,587 4,456 796 - volia 254,149 182,477 151,188 138.896 132,605 91,127 14,S30 Uoit PrtNe 33.6 33.9 36.7 45.5 49.7 48.9 53.7

Val'.. 2,234 1.531 2,447 5,406 6,054 5,950 S.702 11,784 Vol'kie 28,725 20,852 32,647 60,066 62,700 61,191 88,488 1.A,S15 U.1t Pfti.. 77.8 73.4 75.4 90.0 96.6 97.2 98.3 102.6

K..t V.1.. 13,949 17,354 13,515 11.290 15,245 20,796 29.7s8 40 410 Vol c 20,475 27,532 17.719 17.211 23,994 25.510 32.939 35,470 Loit NrL. 681.3 630.3 762.7 656.0 635.4 815.2 904.3 1,139.3

C1.tl. id.. V.I.a 2,586 1,442 1,066 1,191 1.600 1.517 3,665 3,909 Volu. S.161 7,766 7,464 6.845 8,512 8,323 10.631 9,356 U0tt fnin. 316.9 185.7 142.8 174.0 188.0 18t2.3 344.7 417.8

LU-t.wk by-Produ.t. Val.. 293 226 295 430 3G7 278 461 1,290 Vol... 2,342 1,298 1,820 2,135 2,499 2.,35 6,S21 9,030 Uoit Price 125.1 174.1 156.6 201.4 122.8 98.1 . 67.6 142.9

T.bo cco V.1.0 2,475 3,370 4,523 5,626 5,765 4.765 6,6831 7457 Vol.. 8,028 11.561 15.007 19,650 19,344 16.069 21,453 17.524 U1t3 I.rt. 308.3 291.5 301.4 286.3 298.0 296.5 311.4 425.6

Ind.Lra.1 S..d* Val.. 639 418 869 912 1,511 1,848 4,984 12,155 Vol.,. 8,064 5,448 10.581 11.667 18.698 22,238 54,130 59,926 U.it Pri.. 79.0 76.7 82.1 78.2 80.0 83.1 92.1 202.8

K.i,. V.1.. 47 283 99 1 635 477 23 257 701,1 1,465 9,431 3,329 19 23.21 13.599 863 3,S03 'J.ir Price 59.4 30.0 29.7 52.6 27.3 30.6 26.7 67.6

94.tn 7.. V.I.. 1,647 633 616 585 510 105 312 63 V.olu 13,074 4,971 5,308 5,971 5,331 1,064 2,929 574 UaLt Pric 126.0 127.3 116.1 98.0 95.7 98.7 106.5 109.8 t..i.. od V 9g.,.bl V.1.. 609 375 466 275 305 1.372 579 1,596 Vo.lv 7,341 5,654 4.751 3,084 3,480 9,907 7,407 9,265 EN,it fti.0 63.0 *6.3 98.1 89.2 87.6 138.5 78.2 172.5 cff-.. Val. 1,959 1.458 1,895 953 882 1,016 3.116 2,666 V.1,.. 2,855 2,184 2,879 1,517 1.269 1,473 4.152 2,858 13,tbtN.. 686.2 611.6 658.2 628.2 695.0 689.7 750.3 932.5

C.ttCG rib-. v.lu. 1,968 2.290 1,395 3,205 4,048 635 2,815 11,622 .r>.uii :,64 4,12: 4,451 8,358 1l,216 1,88b 1 59f t8,60o.. unit Nri.. 350.9 365.2 313.4 374.5 360.9 289.3 502.3 624.6

So&., V.l. * 5 1 25 17 a 1 1.968 1,103 V.olreo 8 8 340 318 108 8 11.754 6,500 1.t,t NI,.. 73.' 125.0 73.5 53.5 74.1 125.0 167.4 189.7

S C.n. s0 .d, 's1 V 4 29 48 10 23 143 175 242 Vol... 7 37 63 13 41 953 989 1,386 Ujit PrL10 571.4 -783.8 761.9 769.2 561.0 150.0 176,8 174.6

C,..o,,.t Oil VMIu. 1,746 1,628 2,374 2,128 2.676 3.723 2.345 3,012 Volun 6,930 6,227 8,080 6.840 10,389 12,346 7.025 10,929 U1,t Nti.c 251.9 261.4 293.8 240.7 276.6 301.6 333.8 275.6

TooS 0t1 V.I.. 2.578 2,930 2.236 2.422 3,527 3.745 3,090 1,938 n uolu_ 8,140 14.387 12.939 11.002 10,069 17,534 21.115 6,655 Uott Pvtc. 316.7 203.7 172.6 220.1 350.3 213.6 146.3 291.2

Oth. O), V.W.. 6 14 146 25 591 698 259 1,656 Vol.0. 25 61 537 103 1,811 2,261 604 4,339 Unit rr1.. 240.0 229.5 271.9 242.7 326.3 308.7 322.1 381.7

Z-ti. .. l o0l. Va-.U 1.398 1,485 1,676 1,748 2,046 2.315 3,006 7,662 Vol.. 421 441 496 493 634 581 673 976 oltL Frrtc. 3,320.7 3,367.3 3,379.0 3.545.6 3,227.1 3,984.5 4,466.6 7,850.4

C.ke. nd Epn'1.r V.I.. 566 525 970 1,280 2,490 503 1,473 11,2?6 Vol. . 18,.17 12.314 30.235 32,350 55,128 11.144 26,940 61,526 U1Lt Prti,. 30.1 42.6 32.1 39.6 45.2 65.1 54.7 138.3

Qu - h ' ltr,.ct V.I.. 3,086 1,985 2.054 1,913 1,961 2.215 2,396 2,405 Vol. 26,643 16,812 17,428 16,118 14.485 15.243 16,054 16,054 U01t F1.- 115.0 118.1 117.9 118.7 135.4 145.3 149.2 149.8

C. -ut VVl .. - - - 116 317 477 267 124 Vol. - - - 4,625 16.580 28.775 16,040 8,195 U11t Pri.. - - - 25.1 19.1 16.6 16.6 15.2

?.1.. n-ot. V7.1. 118 91 103 139 112 107 59 47 Vol.. 63 46 67 SO 71 61 39 41 Unit PrNc 1,873.0 1,978.3 1,537.3 1,737.5 1.577.5 1,754.1 1,512.8 1.135.1

Vllod i1 Slci V.I.. 459 535 742 614 516 214 226 259 Voluaws 128 167 177 131 114 52 97 117 Utce Nrina 3,585.9 3,639.5 4,192.1 6,213.7 4,526.3 2,609.8 2.329.9 2,213.7

Gtb.r Soda..t..1.1 Nod..ota Vt lc.. 2,015 2,912 3,827 4,079 6,066 7,526 7,767 3,495 Vol.. 4,816 7,684 13,578 10,679 17.722 54,609 31,386 5,729 Unic Pi.. 418.4 379.0 281.9 382.0 342.3 137.8 151.2 410.1

Och.r rroduct. Val.. 452 617 647 70 91 120 * 235 500 Volua. 6.034 6.047 6,466 315 855 1,766 3,163 4,529 Ualt Nri.. 74.9 102.0 100.1 222.2 106.4 68.0 76.3 110.4

T(Yr^ALE?OXrK V.I.. 49,3t85 48,259 47.575 50.953 64071 653.204 "ja. 126.928

S,.-rct: CanCra- Bank; 9I-to. E.I..t - 25 -

52. The main components of the capital account remained remarkably stable between 1966 and 1972. The capital account balance averaged US$25.7 million and, with the exception of 1966 when the inflow fell US$10.0 mil- lion below the average, and 1969 when it rose US$7.0 million above, dis- persion was small (Table 16). The structure oLEtnese inflows also remained very stable. The multilateralcredit agencies (IBRD, IDA, and IDB) were the main source of funds and accounted for almost one-half of the capital inflows. The application and uses of these inflows, however, experienced some variations, and a trend toward greater short-term capital outflows seems to have developed over the period wnich may indicate either rising capital flight or growing contraband imports. These trends have continued in 1973 (Table 16).

Table 16: CAPITAL ACCOUNT 1966/72 AND ESTIMATE 1973 (In Millions of US$ and Percentages)

Average 1966/72 US$ Millions Percent US$ Millions Percent

Source 25.7 100.0 26.5 100.0

Direct Investment, net 3.3 12.8 5.4 19.0 Official Grants, net 2.9 11.3 3.0 10.5 Multilateral Credits, net 11.9 46.3 11.6 40.7 Bilateral Credits, net 5.3 20.6 7.5 26.3 Commercial Credits, net 1.3 5.1 1.0 3.5 IMF SDR's 1.0 3.9 - -

Uses 25.7 1OC.0 26.5 100.0

Changes in Reserves, net 2.9 11.3 22.4 78.6 Short-Term Capital /1 7.0 27.2 i2.- 42.5 Deficit in Current A/C 15.8 61.5 -6.0 -21.1

/1 Includes errors, ommissions, and border trade.

Source: Central Bank, Balance of Payments Yearbook, and Mission Estimates. - 26 -

II. MEDIUM-TERMECONOMIC OUTLOOK

Economic Prospects for 1974

53. Currentprospects for a continuationof rapid economic growth in 1974 are quite favorable. Preliminaryestimates indicate that under the impetus of rapidly rising private and public investmentactivity, GDP growth might well rise by 6.2% this year--almosthalf a percentagepoint abiovelast year's growth. The propellantsof this acceleratedgrowth are expected to be the livestocksector and the overall favorableexport demand for Paraguayan agriculturaland forestryproducts. Moreover, the initiationof the construc- tion of the Itaipu hydroplanttoward year-end,as a joint venturewith Brazil, is also expected to stimulatedomestic demand for foodstuffs,construction materialsand particularlyfor fore.stproducts with which Paraguay is richly endowed.

54. The achievementof a 6.2% growth rate in 1974 is predicatedon an increase in the volume of investmentand a redirectionof investmentprior- ities. The overall level of investmentwill have to increaseby about 10% and greater emphasiswill need to be placed upon the commodity-producing sectors. Increasedprivate sector activity is likely to fulfillboth of these prerequisitesfor higher growth,provided the public sector does not preempt the financialand real resourcesnecessary for the expansionof the private sector and an environmentconducive to higher private investment activity is encouraged. Compliancewith the first conditionwill necessitate the maintenanceof the level of public investmentat some 4.3% of GDP in 1974. The second conditioncan best be met by continuingthe overall economic managementpolicies pursued in the previousyear which aimed at preventing an inflationary spiral, continuingthe ongoing progress toward improving livestock policy and implementing the long-overdue reform of the fiscal system.

55. The authorities appear to be increasingly concerned by the course of inflation. Given the Paraguayan economy's relatively small size, anti- inflationary policy is likely to be only partially effective so long as worldwide inflation persists. The Government strategy to contain inflation has been by and large correct, except for the beef pricing policies followed until recently. As long as fiscal, monetary, and incomes policies continue in their present form, domestically generated inflation is likely to subside. Ilowever, inflationary pressures emanating from the external sector, especially increased world petroleum prices, have become somewhat more threatening. The price of oil landed in Asuncion trebled in recent months. While retail prices of petroleum products were increased somewhat during last year, by far the greatest increase took place in February 1974, when average retail prices were doubled. The first round of the latest price increase in petroleum products is expected to result in an immediate increase of some 3% in the ConsumerPrice Index, but its impact over the year is likely to be somewhat greater. This increase and the projectedprice increasesfor wheat, meat and other staples, combinedwith the recent wage increase,may be expected to generate in 1974 an inflationarypressure equal to or somewhat in excess of last year's. - 27 -

56. As indicatedabove (paragraph18), recent Governmentactions on livestock policy have intended to remove beef price and marketing controls. The authoritieswill need to follow carefullydevelopments in the livestock sector during 1974 with a view to retiovingthe remaining controls by 1975 and replacing them by flexible export:taxes to regulate internal and external demand. In addition, the authoritieswill find it useful to make a thorough study of the structure,problems and needs of the livestock sector. The results of such a study will enable policy decisions to be made on adequate information regarding the size of the cattle herd, reproductionand take-off rates, consumptionpatterns and elasticitiesof demand, and the production and financial structure of the exporting slaughterhouses.

57. Prospects for Central Government finances in 1974 appear to be reasonably good. While the projections are somewhat clouded by uncertainty regarding the responsivenessof revenues and expendituresto increasing prices, the administrativeimprovements carried out during 1973, particularly in the realm of customs administration,and the newly introducedrevenue measures such as beef export taxes, increases in alcohol and gasoline taxes, and other minor adjustments,seem to indicate that Government current revenues will increase by about 20% to 0 14 billion in 1974. Current expenditures, however, are expected to grow more slowly to a total of about ¢ 11.2 billion. As a result, budgetary savings of some ¢ 2.8 billion equivalentto 1.9% of GDP are likely to materialize during the year.

58. The Government'sprojected current account surplus should be enough to cover its capital expenditureswithout recourse to internal borrowing.

Table 17

CENTRALGOVERNMENT CAPITAL EXPENDITrURES; ACTUAL, 1972; ESTIMATE, 1973; AND PROJECTION, 1974

(in Millions of Guaranies) 1972 1973 1974

Resources for InvestmentSpending 842 2,205 2,810

Current Account Savings 842 2,205 2,810

Claims 1,521 1,660 2,810

External Debt Amortization 407 482 672 Counterpart for External Loans 332 389 O79 Non-ProjectizableInvestment 328 237 356 Capital Transfers 454 552 703

Financial Gap 679 -545 -

Source: IDB, Planning Secretariat,and IBRD Estimates. - 28 -

The resources thus released would provide the basis for financing increased activities in the private sector through the expansionof Central Bank lending to the commercial banks and the country's development finance institutions. In this respect, given the need to support a greatly increased volume of private investment, an adequate funding of the Banco Nacional de Fomnto (BNF) should be high on the authorities' priority list. Financial rehabilitation of the BNF, however, ought to be tied to an integral program of reforms enabling the institution to efficiently carry out the important role it should play in the economy.

59. Despite the higher expected level of economic activity, the corres- ponding increase in import demand and the projected sharp increase iu prices of Paraguay's imports, the country's balance of payments prospects in 1974 appear to be reasonably good. Although the ceiling on official beef exports is expected to effectively stop beef shipments from increasing over their 1973 level, exports of goods are expected to increase by almost 17% in real terms during the year. Increased output of soybeans, cotton, tobacco, sugar and lumber are likely to account for most of the increase. The recent rise in Paraguay's export prices is expected to slow down considerablyin 1974, when the price index will probably increase by some 6%, as compared to the previous year's rise of 41%. As a result, Paraguay's export earnings are projected to increase by some 23% to a total of US$156 million in 1974. Imports of goods, however, are likely to grow by over 36% to US$150 million. Onlv 7.3% of this increase will represent increased demand for imported goods while the remainder will be due to higher import prices, particularly of petroleum products, flour and wheat. The increase in petroleum prices alone is expected to have an impact of about USS7 million f.o.b. assuming no increase in consumption takes place as a result of the recent sharp increase in retail prices. As a result of these trends, the country's trade balance surplus is expected to decline from about US$16 million in 1973 to about US$6 million in 1974. The services accounts are projected to transform this small trade surplus into a current account deficit of almost US$20 million for the year, as compared with the 1973 overall deficit of US$10 million.

60. The current account deficit is expected to be fully covered by capital inflows in spite of their projected decline. As a result of a projected decline in disbursements on medium- and long-term loans and of an anticipated increase in amortizationpayments, net capital inflows are now expected to fall from US$28.5 million in 1973 to US$19.9 million this year. This decline would preclude any further accumulationof foreign exchange reserves. The projected reserve level of US$53 million at the end of the vear is neverthelesslikely to be appropriateand would be equivalent to some four months' imports.

Medium-Term Prospects, 1975-79

61. Paraguay's medium-term development prospects appear to be promising. The country's objectives of accelerated economic growth and more equitable distribution of income appear to be attainableand the Government'sstrategy of concentrating the growth effort in the agricultural, livestock and forestry sectors is consonant with the achievement of these goals. The potential for further agricultural growth lies in a variety of favorable factors: the existence of large areas of unutilized land of Rood to excellent Table 18: SELECTEDECONOIIC DEVELOPMENTDATA

Average Actual Eatieate Pro ections Crovrh Rates As Percent,e of GDY 1967-69 1972 1973 1974 1975 1976 1974- 1965-70 1970-73 1973-75 1975-79 1'92 1974 1976 1919'

Natlonal Accounts - Millions of 1972 US Dollars

CDP 630.6 769.0 814.1 864.7 918.1 975.1 1.201.3 4.6 5.2 6.2 7.0 100.0 98.9 99.9 1:0.7 Caine fro. terms of trade 1.4 . 25.9 9.3 4.8 0.8 -7.8 - - - !.1 0.1 -0.7 Gross donestic income 632.0 769.0 840.0 874.0 922.9 975.9 1.193.5 4.9 5.7 4.9 6.6 100.0 100,0 100.0 100.0

Imports (incl. NFS) 128.4 99.4 139.1 148.9 159.3 170.4 220.3 3.2 9.9 7.0 8.4 12.9 17.0 17.5 18.5 Exrports (import capacity) 89.1 106.2 138.9 141.8 153.5 159.9 191.3 -0.3 22.3 5.1 5.7 13.8 16.2 16.4 16.0

Consumption 565.9 634.9 683.1 697.8 745.1 791.4 963.0 5.3 2.8 4.5 6.6 82.6 79 F 81.1 80.7 Investorent 105.4 127.3 157.1 183.3 183.6 195.0 259.5 4.8 12.1 8.1 9.0 16.6 21.0 20.0 21.7

Natlonal savings 61.9 125.3 147.7 168.1 17t.6 181.3 2Z6.7 0.5 26.6 7.8 7.2 16.3 19.2 18.6 18.9 Dmestic savings 66.1 134.1 156.9 176.2 177.8 184.5 230.5 1.9 23.6 6.4 6.7 17.4 20.2 18.9 19.3

Price rndLcrs (1972 * 100)

CDP deflator 82.8 100.0 122.8 147.3 169.5 186.4 234.7 1.3 13.0 17.5 8.5 Import price Index 74.8 100.0 109.4 136.8 143.3 150.8 175.8 1.6 9.0 14.0 5.2 Export price index 76.5 100.0 140.9 148.9 Le9.4 151.7 166.6 2.2 11.8 3.0 2.8 Terms of trade index 102.3 100.0 128.8 103.9 104.3 100.6 95.1 0.6 2.5 -9.1 -2.1

Public Flnance - Millions of US Dollars!'

Current receIpts 60.2 75.2 90.7 79 86 91 118 7.2 .3.1 7.9 8.2 9.8 9.0 9.3 9.9 Currenc expcnditures 50.1 68.5 73.2 64 68 - 72 90 7.8 -4.4 6.8 7.3 8.9 7.3 7.4 7.5 Budgetarv savin£ 10.1 6.7 17.5 15 18 19 i8 4.0 3.5 12.2 11.7 0.9 1.7 1.9 2.3 Other publlc sevtig 9.1 10.0 10.7 10 12 14 24 3.4 -7.7 11.8 19.0 1.3 1.1 1.4 2.0 Public sector investoest 34.2 43.9 49.7 37 41 49 93 7.9 13.2 1.2 22.8 5.7 4.2 5.0 7.8

|1 1974-79 projections in 1972 prices. In constant prices, 1973 was aa follows: Current receipts US$73.9 million; Current expendiltures, US$59.6 million; ,Budgetary Saving, Us$14.3 million; Other Public Savlgs, US$8.7 million; Public Sector Investisent, US$40 million. - 30 -

quality; a great. potential for hydroelectric development which could serve as a base for future agriculturalprocessing and forest industries;and, most importantof all, a ready market for a large number of products in neighboring countries, the and Europe.

62 . Provided that the satisfactorystandards of economic management achieved in 1973 continue, the Government'.objective of sustaining the medium-term growth rate of output at between 6% and 7% per annum does not appear to be above the possibilities of the Paraguayan economy. The shift to this higher growth path would be a considerable improvement over the 4.5% growth rate achieved in the 1960n and would permit steady improvementon the order of about 3.5% annually in per capita incomes. As in the immediate past the principal sources of growth are expected to be external demand and investment demand. With regard to the former, while the world price outlook for the country's exports is not particularlybright, no external market constraints are likely to develop in the immediate future. Thus, provided the country can expand its output of agricultural, livestock and forestry products, the outlook for export growth should be favorable. As for private 4nvestment demand, if it rema:Lns unhindered by excessive claims on resources by the public sector it is likely to continue its growing trend of the 1960s and early 1970s and may be expected to attain an average of roughly 15% of GDP during 1975-79, as compared with 10% during 1967-69. At the same time, public sector investment could be maintained at approximately5% to 7% of GDP within the frameworkof an overall level of gross investment of some 20% to 22% of GDP.

63. A sustained acceleration of the medium-term growth rate will depend on (a) the public sector's capacity to identify, elaborate and execute a steady pipeline of development projects oriented towards the direct support of the commodity-producing sectors and (b) the implementation of a compre- hensive reform of the tax system which would lessen its dependence on import duties and make it more responsive to the growth of the economy.

64. The need to reinforce project planning and execution capacity of the public sector requires the Government'simmediate attentionif the country is to take full advantage of the developmentopportunities offered by the constructionof the gigantic Itaipu hydroelectricplant financed by Brazil. This need is further accentuatedby the Yacireta-Apipeand Corpus hydroelectricplants to be constructedjointly with Argentina. In the case of Itaipu, the Treaty regulating the constructionof the project accords 2araguay the right to supply up to one-half of the inputs needed for the constructionof the dam. At this moment, the country is not in a position to make full use of the captive market for incrementalsales of goods and services that Itaipu offers, and which could be instrumental in determining its future productive base. To realize this potential would require a substantialacceleration in the annual rate of growth of public investment over the medium-term--from13.2Z during 1970-73 to about 23Z during 1975-79. TAe Government, therefore,should give a high priority to the task of reinforcing planning and project execution mechanisms. - 31 -

65. The serious fiscal constraints of the early 1970s placed the need to increase Governmentrevenues in the forefront of developmentpolicy. While the authorities continued their efforts to introduce structuralreforms which would increase the built-in elasticit;y of the tax system and lessen its dependence on customs revenues, the pressizig need for funds to carry out development projects relegated this effort to a secondary place. The Government's commendable and successfuL efforts to raise revenues have been achieved, to a certain extent, at the expense of adding to the coaplexity of the tax system and increasing che incidence of some taxes (such as stam, taxes) not conducive to promoting economic efficiency. Now that the fiscai situation does not give cause for immediate concern, the Government ought to renew its efforts to improve the structure of the system. Programs suCL1 as the cadastral survey now underway and the proposed income tax reform should be accelerated,inile revenue objectives could be placed on increasing Governmentsavings from 1.8% of GDP in 1973 to about 2.3% in 1979, i.e., a leveliwhich would be compatiblewith public investmentneeds during the period.

66. To achieve the desired growth objectives, imports of goods and services would have to increase at an average rate of about 8.2% per annum between 1974 and 1979. The present outlook for internationalprices indicates, however, that the average price of Paraguay's import requirementsis likely to increase at an average rate of 5.5% in the quinquennium. Thus, the cost of sustaining the desired level of imports would increase from almost US$200 maillionin 1974 to some US$350-400 million in 1979 (Table 19). A large pro- portion of the import bill could be financed out of increased export earnings. Provided that the economic environment remains favorable, Paraguay has the potential to increase its exports of goods and services at an average rate of 8.5% per annum between 1974 and 1976. The prices of Paraguayan exports, however, are only likely to increase at an average rate of 2.8% per annum, and total export earnings could increase therefore at a slower rate than the import bill, from about US$190 million in 1974 to about US$325 million in 1979 (Table 20). Given the implicit deteriorationanticipated in the country's external terms of trade, the deficit on the balance of goods and services is likely to increase substantiallyduring the period. Taking into account the probable developmentsin other items of the current account, the deficit on current account is likely to increase from about US$20 million in 1974 to almost US$60 million in 1979.

67. The above trends in the country's current account imply that in order to achieve its growth objectives and its foreign exchange reserves -in a manner consonant with the expected increase in the size of the -mpor, bil;, Paraguay would need a total net capital inflow of about US$235 ruilrn iuaing 1974-79 (Table 21). Assuming that about US$45 millior direct fo:em iavest- ment takes place during the period (based on recent experience) and tk.ar official sources provide the country with some US$20 rillion -in ea_iaa g-an:s, Paraguay would rieedto assure a net capital inflow of LAout u>$17 mllor from medium- and long-term loans during 1974-79. Of these reeds, s uSS-20 million are likely to be drawn down from.loans contracted before eeer J'.'e 5 1973. The remaining US$155 million woulG have to come from loar,s to be con- tracted during 1974-79. Table 19: IMPORTS, 1967-69, 1972, 1973 AND PROJECTIONS, 1974-79

(In Millions of US Dollars)

Average I. Imports c.i.f. 1967-69 1972 1973 1974 1975 1976 1977 1978 1979

A. Constant (1972) Prices Food 6.9 5.7 4.2 6.7 6.4 5.9 5.,9 5.8 5.8 Other consumer goods 31.5 23.6 25.8 31.5 33.1 34.8 37.2 39.8 42.6 Petroleum 6.4 8.1 9.0 9.0 9.7 10.4 11.4 12.6 13.8 Other intermediate goods 14.6 12.2 1-9.6 22.3 24,7 27.7 31.0 34.7 38.9 Capital goods 26.2 22.4 42.3 39.2 42.1 45.2 49.1 53.3 57.9 Total goods f.o.b. 85.6 72.0 100.9 108.4 116.0 124.0 134.6 146.2 159.0 C.i.f. adjustment 9.3 6.9 9.6 10.2 10.9 11.7 12.8 13.9 15.1 Total goods c.i.f. 94.9 78.9 110.5 118.6 126.9 135.7 147.4 160.1 174.1 Other non-factor sves. 33.5 20.5 28.6 30.3 32.4 34.7 38.2 42.0 46.2 Total goods and NFS 128.4 99.4 139.1 148.9 159.3 170.4 185.6 202.1 220.3

B. Price Indices (1972 100) FoodT1 114.5 100.0 126.2 211.6 223.8 208.4 211.9 210.3 208.6 Other consumer goods 51.7 100.0 120.9 133.0 146.3 158.0 167.5 177.6 188.2 Petroleum/2 70.3 100.0 138.9 212.9 176.0 183.6 193.0 202.3 211.9 Other intermediate goods 93.2 100.0 97.4 133.0 146.3 158.0 167.5 177.5 188.2 Capital goods 83.6 100.0 100.2 116.8 124.5 131.0 137.9 145.0 152.5 Non-factor services 73.1 100.0 107.9 116.8 124.5 131.0 137.9 145.0 152.5 1 Weighted average (derived from ro A and C totals) 74.4 100.0 109.1 132.8 139.5 146.8 154.5 162.5 170.9 1

C. Current Prices Food (or foodgrains) 7.9 5.7 5.3 14.2 14.3 12.3 12.5 12.2 12.1 Other consumer goods 16.3 23.6 31.2 41.9 48.4 55.0 62.3 70.7 80.2 Petroleum 4.5 8.1 12.5 19.2 17.1 19.1 22.0 25.5 29.2 Other intermediate goods 13.6 12.2 19.1 29.3 36.1 43.8 51.9 61.6 73.2 Capital goods 21.9 22.4 42.4 45.8 52.4 59.2 67.7 77.3 88.3 Total goods f.o.b. 64.2 72.0 110.5 150.4 168.3 189.4 216.4 247.3 283.0 C.i.f. adjustment 6.8 6.9 10.4 11.9 13.6 15.3 17.7 20.2 23.0 Total goods c.i.f. 71.0 78.9 120.9 162.3 131.9 204.7 234.1 267.5 306.0 Other non-factor avcs. 24.5 20.5 30.9 35.4 40.4 45.5 52.7 60.9 70.5 Total goods and NFS 95.5 99.4 151.8 197.7 222.3 250.2 286,8 328.4 376.5

/, Weighted for grains.

A Based on "medium projection" of petroleum prices. 1974 computed on the basis of signed contracts at US$21.04 per barrel and the remainder at US$13.69 per barrel c.i.f. Asunci6n.

General Note: The estimates ere based on the IBRD, February 28, 1974 price projections. - 33 -

Table 2), E1P04OM, 1967-69. 1972. 1973 4od FKotrmT1o0S, 1974-79

(I. Th.o.,od.of t'S DoIlaar) Average 1967-69 1972 1973 1974 1975 1976_ 1977 1978 1379

A. Cont-rt (197?1 Price,

1. Lurber 17.949 9,498 10.551 11,606 12,767 14,043 15,W7 16,992 18,691 2. Be-f 18,828 29,788 32,076 32,076 33,038 34,029 35,050 36,101 37,191, 3. Hid" -d ti, 2,536 3,665 3,225 3,225 3,322 3,421 3,524 3,6296 3,737 4. Liv-ntv k bv-produ-t, 118 461 610 610 628 647 666 U6 77 5. Tob--,o 4,797 6,681 5,457 7.172 7,889 8,678 9,546 10,500 11,550 6. lbld-s ri31 Seeds 850 4,984 5,519 10,135 11,149 12,263 13,489 114,38 1?6,32 7. Klime 114 23 102 105 108 I:I 1 1ii 321 8. MLte toe 577 312 61 62 63 65 67 69 71 9. , .. d -egrtable, 352 579 725 740 754 769 804OO 816 10. Coffer 1,696 3,116 2,145 2.295 2,456 2,628 2,8a2 3,009 3,239 11. CoLton 3,230 3,815 9,350 14,075 15,483 17,031 18,734 20,608 3 ,36 12. S.,ga- 37 1,968 1,088 2.009 2,210 2,431 2,674 2,942 3,636 13. Ca e Sprit,. 7 175 245 294 352 423 50° 609 733 14. Coor--t ill 2,576 2,345 3,648 4,016 4,216 4,428 41,6L.9 14,882 5,326 15. Tung oIl 1,869 3,090 974 1.023 1,074 1,128 1,3184 1,21L4 3,23 16. Otitc oil, 75 259 1,398 1,608 1,8149 2,126 21,14. 1,812 3,2 3, 17. Etsentll oifls 2,131 3,006 4,359 4,882 5,468 6,124 6,659 7,682 8,6t4 18. Cai, n-d -og,llers 1,366 1,473 4,459 4,994 5,294 5,611 5,948 6,305 6,683 19. Q-ebr-cdtu-r,ct 2,504 2,396 2,395 2,443 2,492 2,542 2,593 2,645 2,698 20. Portl-1y ccect 26 267 136 163 187 216 2169 288 333 21. rl.nlocIr-- 97 59 62 60 62 64 66 61 70 22. Wild .mim.l nkisn 354 226 273 246 221 i99 179 161 145 23. Other irdmstrial product, 1.610 7,767 866 935 1,010 1,091 1,178 1,213 1,3714 24. Other goodc 318 235 337 344 351 358 365 372 1 30 25. Total goods 64,017 86,188 90,061 105,128 112,443 120,426 129,130 134,233 5149,0O6 26. Uonfactor oc,vice. 23,667 20,000 22,984 27,397 36,225 38,702 43,169 46.372 50,066

27. Total goods & NFS 87,684 106,188 113,045 132,515 148,668 159,128 172,299 180,605 199,072

S. Pric- Indices 12972=1O)

1. L-bcr 51.0 100.0 111.7 116.6 128.1 141.6 153.2 166.5 183.2 2. Beef 74.6 100.0 126.0 140.5 140.5 140.5 L1.5.3 150.2 355.0 3. Hides and ski,s 48,6 100.0 121.2 127.4 139.8 139.8 149.1 155 3 161.5 4. Livento-k by-products 266.1 100.0 211.5 235.6 235.8 235.8 243.9 25?.1 260.2 5. Tobacco 93.9 100.0 136.7 140.9 149.6 159.6 168.3 176.9 135.4 6. Ind.strial seeds 86.2 100.0 220.2 141.2 133.2 130.7 132.2 135.7 142.1 7. haisc 112.3 100.0 252.0 309.7 284.6 258.4 253.2 2L5.3 250. 5 8. mate t-a 105.9 100.0 103.3 116.4 108.5 108.5 1lG6.5 108.5 136.5 9. Fr-it. and 105.7 100.0 220.1 229.2 238.4 247.8 257.8 268.0 278.7 10. Cyffen 84.6 100.0 124.3 140.3 130.7 130.7 13J.7 230.7 2140.3 11. Cotton 71.1 100.0 124.3 187.5 175.5 170.6 163.6 159.2 152.4 12. SogXt 37.8 100.0 101.4 115.4 121.2 126.3 133.6 210.3 146.9 13. Cane spirits 414.3 100.0 98.8 114.2 88.4 93.4 98.6 109.1 114.1 14. Co.on.t oil 79.3 100.0 82.6 114.1 114.1 113.2 112.3 J.1.3 1:'7.I 15. Tong oll 135.3 100.0 199.0 181.4 176.4 175.1 173.9 171.3 67.5 16. Other oIls 82.7 100.0 118.5 122.5 121.9 119.6 117.3 114.L 110.4 17. E-sentiol nils 76.8 100.0 175.8 190.3 202.8 213.4 224.7 236.2 248.6 18. Cakes a.nd c-pellers 67.7 100.0 252.8 162.2 153.0 150.1 151.9 156.0 16i.2 19. Cuebranh.o etract 79.2 100.0 100.4 108.7 115.9 121.9 126.3 134.9 11.1.9 20. Portlond Oroent 1500. 100.0 91.2 99.4 105.4 111.4 216.5 122.8 129.5 21. P..lo 1ohs 114.4 100.0 75.8 81.3 86.6 91.1 95.9, 100.9 106.1 22. Wild an.t.i1 kins 196.9 100.0 94.9 102.9 109.6 115.3 121.4 127.7 1311.3 23. Other ind..trial products 224.0 100.0 403.6 437.0 467.7 489.9 515.5 5.2.14 570.6 24. Other products 139.9 100.0 148.4 161.0 171.5 180.3 189.9 199.7 210.0 23. Total goods 76.5 100.0 140.9 148.9 149.4 151.7 156.0 166.3 166.$ 26. NonfaCtor aervic.s 73.1 100.0 107.9 116.8 124.5 131.0 137.6 3L4.7 152.2

27. Total goods & NFSi 75.6 100.0 134.2 142.2 143.3 146.7 151.4. 160.8 163.0

C. Current Prie,

1. Liober 9.145 9,498 11.784 13,533 16,380 19,884 23,665 28,292 314,242 2. Beef 14.053 29,788 40.410 45.067 46,418 47,811 50,928 514,224 57,635 3. Hides and skins 1,233 3,665 3.909 4.109 4,644 4.783 5,251 5,636 6,037 4. Liv.ot.ck by-products 314 461 1,290 1,438 1.481 1,526 1,621 1,729 2,81,0 5. Tobacco 4.506 6,681 7.457 10,105 11,802 13,852 16,061 18,575 2.1.414 6. Irdontrlal seeds 733 4,984 12,155 14,311 14,850 16,028 17,8.32 20,135 23,030 7. YBala 128 23 257 325 307 287 289 289 303 8. KMte tea 611 312 63 72 68 71 73 75 93 9. Frolrn -od . 372 579 1,596 1.696 1,798 1.906 2,022 2,11h 2,274 10. Coffee 1.435 3.116 2,666 3.220 3,210 3,435 3,675 3,933 ,516 15. Cotton 2.297 3,815 11.622 26,391 27,173 29,055 3C,6L9 327,04 34,5.6 12. Sugar 14 1,968 1,103 2,318 2,679 3,070 3,572 L,128 4,7i; 13. Cane spirit. 29 175 242 336 312 395 503 6fi, 8314 14. Coccnut oll 2,043 2,345 3.012 4,5S2 4,810 5,012 5.,21 43 5,65; 1I. Tung ol 2,529 3,090 1,938 1,856 1,895 1,975 2,059 ,3.3 2,1a3 16. Other oil, 62 259 1,656 1,970 2.254 2.543 2,dc8( ,3, 36,5S9 17. F.ment.il olIn 1,636 3,006 7,662 9.290 1 .069 12,069 15,4i2 1,45J 2), 3-0 18. Cakes and copeller 925 1,473 11.276 8,100 8,100 8.422 9,035 9,836 10, 40 19. Quebracio extract 1,984 2.396 2,405 2,656 2,888 3.099 3,327 3,566 3,5?t 20. Portlnd .,ntne 39 267 124 162 197 241 291 354 43' 21. Pisle clocrIcs 111 59 47 49 54 58 63 62 7 22. Wild -l-n,nI bki.. 697 226 259 253 242 229 2:7 206 135 23. Otlher Inrltal prodota 3,606 7,767 3.495 4,08o 4,724 5,35 6,0?6 6,90,2 7,6140 24,. Otli-r prodhct, 445 235 500 5%4 b02 645 93 7143 79!; 25. 1otal -Jod 68,947 86,168 126.929 1s,,,479 167,977 182,741 201.4c/, 223,2bO 2749,265 26. b,,nl,i Oee_ic... 17,300 20J000 24,800 32,000 45,100 50.700 59.400 67,1W0 76 ,. X0

27. Total Rood, & Nrs 66,247 106,18a 151,728 185,479 213,07? 233,441 260,h86 290,340 324,1469

/Ir in, hI.... rcA,.i en...).,,,-. f,,,nc,, ,c tr I Tt.,ip,, n-1 Y-trrf-.Api, 1,-). Table 21: 9ALANCE OF PAYMFNIS. 1967 69, 1972, i973 AND PROJECIIONS, 1974-79 (In Millions of US Dollars, ctirrent prices)

Average 1967-69 1972 1973 1974 _195 1976 9 1978

Current Prices

1. Imports (incl. NFS) (-95.5) (-99.4) (-151.8) (-197.7) (-222.3) (-250.2) (-286.8) (-328.4) (-376.5) 2. Exports (incl. NFS) (66.2) (106.2) (151.7) (188.5) (213.1) (233.4) (260.8) (290.3) (324.5) 3. Balance of goods & NFS -29.3 6.8 -0.1 -9.2 -9.2 -16.8 -26.0 .38.1 -52.0 4. Factor Services - total -5.6 -11.1 -12.5 -13.2 -11.3 -7.4 -8.1 -8.6 -9.5 a. Interest on public debtk/ (-4.5) (-9.6) (-11.1) (-12.0) (-10.0) (-6.1) (-6.6) (-7,0) (-7.7) b. Profits and dividends (-1.5) (-2.4) (-2.5) (-2.4) (-2.5) (-2.6) (-2.8) (-3.0) (-3.2) c. Other factor services (0.4) (0.9) (1.1) (1.2) (1.2) (1.3) (1.3) (1.4) (1.4) 5. Workers remittances _ - - - - - 6. lurrent transfers, net 2.5 2.3 2.5 2.5 2.6 2.7 2.7 2.9 3.0 7. Balance on current acc. -32.4 2.Q -10.1 9-17.9 -31.4 -43.8 -58 5 8. Private direct investment 2.9 6.0 S,4 6,5 7.5 9. Official capital grants 2.6 2.7 3.0 3.0 3.0 3.0 3.5 3.5 3.5 10. Public M & LT Loans a. Disbursements (26.7) (24.8) (30.9) (26.2) (26.7) (30.2) (34.2) (39.6) (43.0) b. Repayments (-4.6) (-7.1) (-10.8) (_15.3) (-15.7) (-13.0) (-13.8) (-13.6) (-.14.8) c. Net disbursements 22.1 17.7 20.1 10.9 11.0 17.2 20.4 26.0 28.2 11. Other M & LT, net - _- - - - - 12. IMF drawings - 2.2 - - - - - 13- n-.her short term 3.6 -13.1 4.0 - - - 14. Use of reserves 0.6 -10.4 -22.4 - -2.6 -7.0 -9.1 -10.4 -12.0 15. Uncovered gap - - _ - - 1.3 9.1 16.7 30.3 Total capital acc. 32.4 2.0 10.1- 19.9 17.9 21.5 31,4 43.8 58.5

Memo Items

16. Imports after cuts in 15 95.5 99.4 151.8 197.7 222.3 248.9 277.7 311.7 346.2 17. Reserves (net) and period 8.9 30.6 53.0 53.0 55.5 62.6 71.7 82.1 94.1 18. Debt service ratios PubliC 13.8 15.7 14.4 14.5 12.1 8.2 7.8 7.1 6.9 Total2/ 16.0 18.0 16.1 15.8 13.2 9.3 8.9 8.1 7.9 19. External debt outstandings Disbursed (beginning of period) Public 40.3 106.5 114.9 125.8 136.8 155.3 184.8 227.5 286.0 Total,...... IBRD 0.1 8.0 10.2 11.8 14.5 19.2 25.4 33.0 41.6 IDA 5.7 19.9 23.0 24.8 27.1 29.6 33.0 37.1 41.3 20. TBRD debt service as 7. of Public debt service 1.1 6.6 4.1 5.1 5.8 8.9 10.3 12.6 12.9 Total debt service 0.9 5.8 3.7 4.7 5.3 7.8 9.1 11.0 11.3 21. IDA debt services as % of Public debt service 1.1 1.2 1.4 1.1 1.2 2.1 2.0 2.4 2.2 Total debt service C09 1.1 1.2 1.0 1.1 1.8 1.7 2.1 1.9

1/ In 1975-79 interest payments on public debc are probably understated.

2/ Includes profit and dividend remittances.

Geieral Note: The esticates are based on the IBRD, February 28, 1974 price projections. - 35 -

68. It is estimated that to assure the additionalcapital inflow of about USS155 million during 1974-79, new external commitmentsentered into by Paraguay during the period would be at least US$335 million. On the basis of existing programs, Paraguay may reasonably expect to contract new loans with internationalorganizations for a total of almost US$200 million. Furthermore,the country is likely to be able to obtain loans and credits for over US$60 million with official bilateral sources of finance and about US$20 million with other traditional lenders. Paraguay may, therefore, reasonablv expect to enter into new commitmentsof a concessionaryand semi- concessionarynature for a total of US$250-300 million during 1974-79. However, additional commitmentsof almost US$60 million in the form of suppliers' credits, financial credits, etc., would be needed to fill the country's external gap.

69. The Public sector's investmentprogram in 1974-79 is likely to amount to some US$360 million in constan. 1972 prices, of which some US$190 million are likely to be amenable to external financing and US$170 millior. are not likely to attract financial assistance from external lenders. Of the projects amenable to foreign financing, some US$120 m_llion are estimated to be foreign exchange costs and US$70 million local currency costs. The US$190 million official capital requirementsin 1974-79 are estimated to be equivalent to some US$135 million in constant 1972 prices. Thus, if in such circumstances external lenders were to finance exclusively the foreign exchange component of projects, a short-fallof about US$15 million in 1972 prices with respect to the country's foreign exchange needs would result. To avoid this predica- ment external lenders will need to finance on the average some 70% of total project costs, i.e., about 20% to 25% of local costs (see Table 22).

70. Paraguay's outstanding and disbursed external public debt, repayable in foreign currency, is projected to increase from about US$127 million in 1973 to about US$300 million in 1979. Despite this increase, the country's debt servicing capacity is expected to improve. The debt-serviceratio is projected to decline from about 14.4% in 1973 to somewhat below 10% in 1979, while the capacity to import is expected to increase at a satisfactoryrate (5.5% per year). This result follows from the projected ir.creasein the country's exports, a trend which already ensued in recent years. Given these expectationsand provided sound economic management continues, Paraguay should remain creditworthyfor considerablelong-term borrowing on conventionalterms. .Nevertheless,intensive efforts should be made by the Government to restrict short- and medium-termborrowing as much as possible. At the same time, because of poverty and appropriateoverall economic policies, the country sihouldalso remain eligible for assistanceon concessionaryterms for a part of its capital requirements. Table 22: Public Investment, 1965-73 anidProjections, 1974-79

(In Millions of 1972 us$)1/

Average Total 1967-69 1972 1973 1974 1975 1976 1977 1978 1979 1974-1979

Gross Domestic Product 630.6 769.0 814 865 918 975 1,045 1,121 1,201 6,125 Investment 105.4 127.3 157 183 186 195 226 242 260 1,292 of which: private sector (64.1) (83.4) (117) (146) (145) (146) (163) (166) (167) (933)

Public Sector Investment 41.3 43.9 40.0 37 41 49 63 76 93 359 Projectizable 27.2 18.6 22.0 16 16 23 34 45 58 192 Foreign Exchange Costs (17.0) (12.0) (16.0) (10) (10) (14) (21) (28) (37) (120) Local Currency Costs (10.2) (8.0) (9.0) ( 6) ( 6) ( 9) (13) (17) (21) ( 72) Non-Projectizable 14.1 25.3 18.0 21 25 26 29 31 35 167

Public Investment Financing 41.3 43.9 40 37 41 49 63 76 93 359

External Financing 19.6 13.8 16.8 ^ 2 11 16 24 32 41 136

Internal Financing 21.7 30.1 23.2 25 30 33 39 44 52 223 Central Government Saving (12.2) ( 6.7) (14.3) (15) (18) (19) (22) (25) (28) (127) 0 Other Public Sector Saving (11.0) (10.0) ( 8.7) (10) (12) (14) (17) (20) (24) ( 97) Other 'smecsticFinancing (-1.5) (13.4) ( 0.2) ( _) ( -) ( -) ( 2) (-1) ( -) ( 1)

Cost-Sharing Formulae External Financing as % of Total Project Costs 72.1 74.2 76.4 74.4 70.0 71.3 70.3 70.1 70.0 70.1 Foreign Exclange Financing of Local Costs as % of Local Costs 15.7 15.0 44.0 31.7 20.0 26.7 22.3 22.4 17.1 22.2

Memorandum Items Investtnent/GDP 16.7 16.6 19.3 21.2 20.0 20.0 21.6 21.6 21.6 21.1 Public Investment/GDP 6.5 5.7 4.9 4.3 4.5 5.0 6.0 6.8 7.7 5.9

1/ Public investment in constant US$ was obtained from the current US$ series and the projected price index for imported capital goods.

Source: IBRD staff