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Report No. 299a-PA FilE 1912/14 EconomicMemorandum on Paraguay - '* & 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 Agriculture ............................. 6 AgriculturalProduction .............................. 7 Livestock 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. CREDIT 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 Lumber 11.8 9.3 Resource Gap (deficit - -) -29.3 6.8 -0.1 Cotton 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.