Paraguay WT/TPR/S/26
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I. THE ECONOMIC ENVIRONMENT
(1) Introduction
1. TheRepublicofParaguay,withanareaof406,752squarekilometresandanestimatedpopulation
of4.9million (1996), isalandlocked country located inSouth America; itisbounded byArgentina,
Bolivia andBrazil. TheParaguay River divides thecountry intwoparts: intheeastliegrassy plains
andwooded hills; inthewest, amarshy plain bordering therivergives waytodryforest andthorny
scrub. Theclimate issub-tropical intheeastandsemi-arid inthefarwest. Thecapital, Asunción,
withapopulation ofsome 502,000, islocated onthewestern border withArgentina andisoneofthe
country 'stwomajor river ports.
2. GDP percapita wasestimated atsome US$1,933 in1996, almost double thelevel of1989
when aneconomic reform programme waslaunched (Table I.1).There havebeenrelatively fewsocial
programmes inthepast,butthese arenowbeing planned asincome risesfrom exports ofelectricity
from Itaipú, theworld 'slargest hydroelectric scheme. Therateofpopulation growth ofsome
2.8percentisoneofthehighest inLatin America andisfalling onlyslowly: thefertility ratedeclined
onlyslightly from4.8births perwoman in1980to4.7in1994, while lifeexpectancy increased from
about 66inthe1970s to68by1994. Allchildren receive primary education, while 29percentare
enrolled insecondary school, upfrom 20percentinthe1970s.
Table I.1
Economic developments, 1989-96
1989 1990 1991 1992 1993 1994 1995 1996
(Average annual growth rateinpercent)
RealGDP 5.8 3.1 2.5 1.8 4.1 3.1 4.7 1.3
Consumption 2.1 11.0 3.7 7.2 5.3 8.5 1.8 ...
Gross domestic investment 10.1 9.2 8.6 -6.5 2.3 4.5 4.9 ...
Exports ofgoods andservices 8.0 19.6 7.4 -4.1 39.6 6.5 16.9 -5.7
Imports ofgoods andservices -14.2 66.7 14.5 4.1 31.6 26.7 11.4 -9.6
Inflation ... 44.1 11.8 17.8 20.4 18.3 10.5 8.2
Unemployment rate(%) ... 7.5 9.4 9.8 9.0 9.4 8.1 9.8
Memorandum:
Population ('000) 4,089 4,219 4,334 4,453 4,575 4,670 4,828 4,955
GDP/capita (US$ current prices) 1,006 1,253 1,443 1,448 1,495 1,672 1,858 1,933
School enrolment ratio (%)
Primary 105.8 107.5 109.4 110.5 111.1 ... ... ...
Secondary 29.2 30.1 30.4 33.8 ... ... ... ...
Tertiary 7.9 8.2 ... ... 10.1 ... ... ...
... Notavailable.
Source: Banco Central delParaguay (1997); Informe Económico, February; Banco Central delParaguay (1996), Estadísticas Económicas,
December.
3. Economic growth, asmeasured byrealGDP, hasbeenmoderate butquite variable inrecent
years, andinflation hasbeenbrought under control. More recently, growth hasbeenaffected byan
appreciating currency, expensive credit andtherecessionary impact ofthe1995 financial crisis, but
somerecovery isexpected in1997. Economic performance ishighly vulnerable totrends inagricultural
production andexports (cash crops), aswellasshopping tourism, forwhich Paraguay isaregionalWT/TPR/S/26
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centre. Attempts toreduce thepublic sector deficit havehadaninitial negative effect oneconomic
growth, butprogress inpublic sector reform hasbeenretarded bypolitical considerations.
4. Recent increases in,andgreater diversification of,foreign direct investment inflows appear
tobelinked topolitical andeconomic reforms, greater integration intotheglobal economy, including
through membership oftheWTO andMERCOSUR, aswellasatradition ofmarket openness and
abundantcheapsuppliesofelectricalenergy,whichfavourParaguay'slong-termeconomicdevelopment.
(2) Recent Economic Developments
(i) Composition andgrowth ofGDP andemployment
5. Inrecent years Paraguay hasexperienced lowtomoderate ratesofrealGDP growth, generally
below thepeaklevel of1989; thelowof1.3percentin1996 wasmainly duetothecontinued
recessionary impact ofthe1995 banking crisis, discussed inChapter IV(Table I.1). Theuneven
GDPgrowthmainlyreflectsdevelopmentsintheagriculturalsector,linkedtoadverseclimaticconditions,
world commodity prices andcredit supply. Other factors include: anincrease ingovernment spending
intherun-up totheMay1994 presidential elections, followed byaperiod offiscal andmonetary
austerity;thepostponementortrimmingofpublicinvestmentprojectsinresponsetolowerfiscalreceipts
andtheneedtosupport thebanking sector in1995/96; andadecline inprivate investment in1995
because ofpolitical andfinancial uncertainty.
6. Forecasts indicate thatgrowth istorecover to3percentin1997. Thisexpansion isexpected
tobedriven byarecord soybean harvest, anincrease inpublic andprivate investment, anexpansive
fiscal policy inthe1997 budget, recovery indomestic demand andhigher growth inArgentina and
Brazil, inparticular. However, much depends onthemovement ofworld prices forsoybeans and
thestrength oftherecovery inArgentina andBrazil.
7. Since 1989, theshare oftradeingoods andnon-factor services inGDPhasmore thandoubled
toreach 88percentin1996 (Chart I.1). Thisdevelopment isexplained byasubstantial increase in
theshare ofexports ofgoods andservices inGDP after1990 under theinfluence ofthereform
programme begun in1989, aswellastheprogressive riseoftheshare ofimports inGDP, mainly
related toimproved procedures forstatistical reporting, customs valuation andregistration.
8. Agriculture isbyfarthemostimportant single sector inGDP, foreign exchange earnings, and
employment, butitsshare varies withclimatic conditions andworld prices (Chapter IV). Between
1990and1995, thecomposition ofGDP moved towards basic services (with thegrowth ofelectricity
output from Itaipú), while thecontribution ofmanufacturing declined steadily (Table I.2). Inrecent
years most jobswere created inservices, including construction, andinagriculture. From 1989 to
1996, realGDP percapita fluctuated inlinewithgeneral economic activity, registering, onaverage,
anannual growth of0.5percent(Chart I.2)withabsolute declines in1990-92 and1996. Ithasbeen
estimated that5percentannual GDP growth istheminimum necessary toliftalarge partofthe
population outofpoverty (Box I.1).1
1Latin American Regional Reports -Southern Cone (1996). Estimates from arecent study bythe
FAO/IBR cited inABC Color ,(1996).Paraguay WT/TPR/S/26
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Table I.2
Structure oftheeconomy, 1990-96
1990 1991 1992 1993 1994 1995 1996a
Share ofmain sectors inGDP (%)
Agriculture 17.2 16.0 15.5 16.0 15.1 16.1 16.0
Livestock 7.5 7.8 7.8 7.7 7.6 7.5 7.6
Forestry 2.7 2.8 2.8 2.8 2.8 2.8 2.8
Manufacturing 16.1 15.9 15.6 15.3 15.1 14.8 14.3
Construction 5.2 5.2 5.4 5.3 5.4 5.3 5.4
Services 50.7 51.7 52.2 52.2 53.4 52.9 53.3
ofwhich:
Electricity 2.8 3.0 3.3 3.7 4.3 4.7 4.9
Commerce &finance 26.4 26.9 26.6 26.5 26.8 26.0 25.4
Government 4.5 4.5 4.8 4.8 5.0 5.1 5.5
Share ofsectors intotalemployment (%)
Agriculture 37.3 36.9 36.2 36.5 35.5 35.8 35.5
Manufacturing 12.8 12.7 12.5 12.3 12.2 12.0 11.5
Construction 6.5 6.2 7.1 7.4 8.0 8.5 9.1
Services 43.2 44.1 44.0 43.7 44.2 43.5 43.8
a Provisional.
Source: Banco Central delParaguay (1997), Informe Económico, February; Banco Central delParaguay (1996), Estadísticas Económicas,
December.WT/TPR/S/26
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BoxI.1 Development challenges andaction
Paraguay 'sfuture development andeconomic growth appear todepend onthetimely elaboration of
strategies andprogrammes addressing issues such asjob-creation, informality, social welfare andrural
poverty.
Oneofthemost serious challenges facing thepresent andfuture governments isthecreation ofjobsto
meet theincreasing labour force. Argentina andBrazil have traditionally provided relief byabsorbing
Paraguay 'sexcess labour. Although restrictive financial andmonetary policies have assisted inthefight
against inflation, theyhave hadaninitial adverse effect oneconomic activity andunemployment.
Business isconcerned about the"unfair" distribution oftaxes andfees, notrecovered from thelarge
informal sector, which includes theunregistered border trade (ofavolume exceeding theGNP).
According toarecent report oftheTechnical Secretariat forPlanning, theinformal sector inParaguay
employs 44percentofallurban workers (excluding domestic servants andpublic-sector workers), of
which 54percentwere inretail trade.
Arecent report oftheSecretariat forSocial Action oftheOffice ofthePresident, indicates thatpoverty
islargely concentrated inrural areas. In1994, public social spending wasamong thelowest inthe
region (asapercentage ofGDP). TheState social security organization (IPS) covers only19percentof
thepopulation, 71percentofwhich liveinAsunción. InOctober 1996, thefirstPlan foraSocial
(Human Resource) Development Strategy against poverty wasannounced.Paraguay WT/TPR/S/26
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9. Topromote economic growth, aPlanfortheReactivation oftheEconomy istobelaunched
in1997, financed withreceipts fromabond issue. Theplanistoinclude thedeepening ofeconomic
reforms; thechannelling offunds totheproductive sector (mainly agro-industry); changes inthe
financial sector; infrastructure andconstruction-related investment; andsupport tosmall- and
medium-size firms.2
(ii) Prices
10. Under theinfluence ofthereform programme, inflation fellfromapeakof44percentin1990
to8percentin1996, albeit withasurge tosome 20percentin1993 (Table I.1). Apart from the
anti-inflationary effects ofmore stringent economic policies, thisreduction ininflation alsoreflects
thedeflationary impact ofthe1995 financial crisis, including weak consumer demand driven bycredit
shortage, extensive useoftheemission ofTreasury Billsandtherealappreciation ofthe
guaraní (Chart I.3).Thisprocess wasalsoassisted byefforts toresist pressure toincrease theminimum
wage level.3Increases inpublic tariffs werealsodelayed, although thiscould haveindirect inflationary
effects byincreasing thepublic sector deficit.
2Última hora,20January 1997.
3In1994, 34percentoftheeconomically active population inurban areas earned lessthantheminimum
wage, oneofthehighest shares inLatin America.WT/TPR/S/26
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11. For1997, theinflation target issetat8percent,butisnotlikely tobemetbecause ofprice
increases inJanuary 1997onbasicpublic goods andservices (water andelectricity charges, petroleum
products, public transport, cement); awidening fiscal deficit, generated bygovernment spending in
thepre-election year; andanincrease of10percentintheminimum wage.
(iii) Exchange ratedevelopments
12. InFebruary 1989, Paraguay replaced itsmultiple exchange raterégime withasingle market-
determined floating rate.Since theCentral BankofParaguay hasintervened tosmooth outundesirable
sharp fluctuations duetochanges inmarket conditions andspeculative capital inflows, butitdoesnot
interfere withunderlying market trends.4Nocontrols areimposed onforeign exchange transactions,
which maybeconducted through commercial banks andexchange houses; nevertheless, sinceJanuary
1997, newlegislation against money-laundering operations hasintroduced registration andscreening
requirements foramounts exceeding US$10,000.5
13. Following theinitial devaluation afterthefloating ofthecurrency, strong capital inflows led
toavirtually continuous appreciation oftherealeffective exchange rate(REER) between 1990 and
1996, withnominal depreciation against theU.S.dollar being lessthanthemovement intherelative
ratesofinflation (Chart I.3). While thisrealappreciation assisted incontrolling inflation, ithashad
anegative effect onthecountry 'scompetitiveness; thistrendisofparticular concern forcotton exporters
faced withdeclining sectoral productivity andcotton profitability.
14. ParaguayhasbeensensitivetoexchangeratepolicydevelopmentsinBrazil,amajortradepartner.
Forexample, following theintroduction ofBrazil 'sPlano Realin1994, Paraguay hasbenefited from
theinitial strengthening oftheBrazilian currency against theUnited States dollar toincrease its
non-traditional exports ofmaize, beer,milkandclothing totheUnited States. Reportedly, thenominal
depreciation oftheguaraní attheendof1996wasaffected byBrazil 'stightening ofitsforeign exchange
allowance (reduced from theequivalent ofUS$250 toUS$150) forshopping tourism, aswellas
Argentina 'sreduction ofimport duties onliquor, electronic goods andperfumes.6
15. AReciprocal Payments andCredits Agreement governs payments among Latin American
Integration Association (LAIA) partners (Chapter II);clearing takes place every fourmonths.7In
1995, Paraguay 'sdomestic regulations withrespect tothisAgreement were amended, toreduce the
4Banco Central delParaguay (1995), p.52; IMF (1996), p.377.
5Money-launderingwasalsomadepunishablewithprisontermsofuptotenyears(Law1015,10January1997).
6EIU(1996a), p.35.
7Under thisAgreement, amultilateral clearing system isoperated through accounts maintained among the
centralbanksconcerned.Recentamendmentsrelatetothedefinitionof"automaticpayments"aswellasresidents'
operations. In1994, adispute settlement mechanism wasestablished toresolve disagreements between thecentral
banks onissues related totheAgreement (LAIA Resolution 76,28September 1994). IMF (1996), p.377;
WTO (1996b).Paraguay WT/TPR/S/26
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riskassociated withguarantees provided bytheCentral Bank ofParaguay onoperations covered by
theAgreement.8Paraguay alsomaintains areciprocal credit agreement withtheDominican Republic.
16. Since 1990, movements inthegrowth ofParaguay 'sinternational reserves havereflected mainly
thewillingness ofeconomic agents torelease theirforeign currency holdings, royalty inflows from
thehydroelectric power plants Itaipú Binacional andEntidad Binacional Yacyretá (discussed in
Chapters IIIandIV)andthefactthatinterest earned onreserves heldinoverseas bank accounts is
lower inrealterms thandomestic interest rates(Table I.3).InDecember 1996, reserves stood atabout
US$1.1 billion, corresponding tomore thantwomonths ofimports.9
Table I.3
Balance-of-payments, 1989-96
(US$ million)
1989 1990 1991 1992 1993 1994 1995 1996a
Current account balance 256 -170 -332 -628 -412 -610 -475 -669
Merchandise trade balanceb164 -270 -758 -871 -932 -1,382 -1,507 -1,378
Exports ofgoods (f.o.b.)c1,180 1,366 1,110 1,054 1,827 2,222 2,961 2,680
Imports ofgoods (f.o.b.) 1,016 1,636 1,868 1,925 2,759 3,603 4,468 4,059
Shipments -131 -202 -251 -269 -329 -295 -407 -462
Other transportation -27 -3 21 11 1 -26 -34 -24
Travel 52 25 366 338 412 540 795 612
Investment income -63 -75 -57 -128 -90 -67 -72 -94
Other services -29 -36 -63 -46 81 235 253 236
Current transfers 24 56 72 72 100 32 72 39
Binational entities 265 335 338 265 346 353 426 401
Capital andfinancial account balance -20 62 151 -212 181 411 234 351
Direct investmentd13 70 84 137 119 164 157 225
Other capital -33 -8 68 -349 62 247 77 126
Long-term capital 18 -140 -35 -126 6 68 89 -34
Public sector 59 -130 -30 -123 -2 71 87 -11
Private sector -36 ... -4 0 4 1 ... 1
Bank deposits -6 -10 -1 -3 4 -4 1 -24
Short-term capital -51 132 102 -223 56 179 -12 160
Errors andomissions -91 327 481 493 317 527 289 207
Overall balance 145 220 299 -347 86 328 47 -111
Change inreserves (-Increase) -145 -219 -299 347 -86 -328 -47 111
... Notavailable.
a Preliminary.
b Includes registered trade based ondataDOT/IMF.
c Includes re-exports.
d Includes direct investment ofbinational entities.
Source: Banco Central delParaguay (1997), Informe Económico, February.
8Informe delExcelentísimo Señor Presidente Constitucional, JuanCarlos Wasmosy, alHonorable Congreso
Nacional ,1July1996,p.15.Reportedly,inthecontextofthe1995financialcrisis,theCentralBankofParaguay
wasdefrauded ofUS$28 million through banking operations under thisAgreement.
9Banco Central delParaguay (1997).WT/TPR/S/26
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(iv) Public finances
17. In1991 thetaxsystem wassimplified by:replacing several small, difficult-to-collect taxes
withavalue-added taxandaselective consumption tax(Chapter III);introducing asingle taxonsmall
businesses, auniform rateofearnings tax,anincome taxonagriculture property, andchanges inthe
sanctions system against latepayments andtaxevasion (Chapter IV).10Improvements intax
administration made since mid-1994 haveledtoarapid increase incustoms taxreceipts. Further
efforts, begun inFebruary 1996, toreduce evasion ofcorporate income taxhavefocused onthemajor
contributors inAsunción andtheborder region withBrazil.11Inresponse torecommendations from
theIMFinMay1996, theGovernment hasalsoannounced itsintention toreduce public expenditure,
andhasincreased theleveloftheselective consumption taxonbeerandcigarettes aswellasthebasis
forVAT valuation under thetourism régime inJanuary 1997. Consideration wasalsogiven to
introducing additional fiscal measures, including theelimination ofthesingle taxonsmall businesses
andtheintroduction ofpersonal income tax.
18. Inrecent years, Paraguay hasfrequently runfiscal deficits. Government revenue ishighly
dependent onindirect taxation mainly intheform offoreign trade taxes andVAT, there being no
personal income tax. Until recently, public spending hasbeendominated bycurrent expenditure
(78percentin1996), withcapital investment bearing thebrunt ofefforts tocontain theoverall deficit;
however, from1997 current expenditure istobekeptataminimum levelandpriority istobegiven
toinvestment ininfrastructure-related projects (seebelow). Savings through public sector reforms
andmore rigorous control ofpublic finance havebeendelayed, partly forpolitical considerations
(Box I.2).12
19. In1996 Paraguay registered arecord fiscal deficit ofabout G/141billion (US$70.5 million)
because ofincreased expenditure tofinance awage riseforpublic sector workers; thebail-out of
collapsed banks; lower receipts (partly duetotheextension ofBrazil 'srestrictions onforeign exchange
allowance fortourist purchases) and delayed payments ofroyalties from theItaipú
Binacional (Chapter IV).
20. The1997Budget isintended toreactivate theeconomy through public works, andabout afifth
ofthefinancial resources areallocated totheMinistry ofPublic Works. However, current expenditure
islimited to40percentoftotalspending, anausterity measure adopted inJune1996. Tofinance
thepublic deficit in1997, amajor increase inbothforeign anddomestic credit willberequired, with
potentially inflationary consequences; aUS$150 million two-tofive-year issue ofTreasury bonds
wasauthorized.
10World Bank (1994a), p.29.
11EIU(1996b), p.25.
12Reportedly, several unorthodox orfraudulent practices have been uncovered inrecent years, causing the
authorities concern about thepossible impact onthecountry 'seconomic performance andprospects, aswellas
itscredibility vis-à-vis potential investors, trading partners ormultilateral lending agencies. These havemainly
related torescue operations ofthe1995 financial crisis, public procurement, thecollection ofimport duties and
portcharges aswellasspeculative useofpublic funds.Paraguay WT/TPR/S/26
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BoxI.2State reforms: Background andprospects
Paraguay 'spublic sector, small byLatin American standards inthe1970s, grew inthe1980s inthelight
ofdirect State involvement inlarge investment projects (e.g., theItaipú hydroelectric power project, a
mini-steel mill, acement plant, asecond international airport). These projects have hadamajor
economic andsocial impact.
Aspartofthereform programme, Law126/91, published on9January 1992, authorized theExecutive
tosellentirely orpartly fiveState-owned companies, setting preferential treatment fornationals. In
practice, littleprogress hasbeen made inthisarea. Since 1992, noprivatization casehasbeen concluded
except forLAP, theairline company, whose assets were fully soldtotheprivate sector in1996 only, and
CAPASA, thealcohol firm, where theState stillretains about onethird oftheshares. Privatization of
thethree other State companies (ACEPAR/steel, FLOMERES/merchant marine, andrailway) hasbeen
delayed forseveral reasons including continuous pressure from trade union federations (including the
public-sector confederation), legal challenges, problems with valuation ofassets, oralackofinterest
from potential buyers (Chapters II,IIIandIV).
Despite thelack ofsignificant progress inimplementing theinitial programme andconsiderable
difficulties inpassing newlegislation, theGovernment envisages further reductions inthedegree ofState
involvement orde-monopolization inother areas, e.g., cement production, electricity production and
distribution, sanitation, telecommunications, certain port services, social security, and banking.
However, itseems unlikely thatoutstanding structural reforms willbecarried outprior tothe1998
presidential elections.
(v) Balance ofpayments
21. Inrecent years Paraguay hasexperienced aseries ofcurrent account deficits, financed byforeign
borrowing aswellaspotentially volatile short-term capital inflows. Despite increasing inflows from
royalty payments from Itaipú Binacional ,thecurrent account deficit hasbeenincreasing, driven by
awidening merchandise tradedeficit. Thisisrelated toParaguay 'sheavy dependence ontwoprimary
export products (soybeans andcotton) whose prices havebeenindecline, aswellasasteady increase
inimports(TableI.3).However,theauthoritiesexpectthecurrentaccountdeficittoshrinkby4percent
in1997 asaresult ofreduced demand forimports andhigher revenue from exports.
(vi) External debt
22. Between 1989 and1993 Paraguay progressively reduced itsexternal debtbyclearing allits
outstanding debttoBrazil through debtswaps (1989-1990) andbynegotiating debtre-scheduling with
creditor nations oftheParis Club onacase-by-case basis rather thansigning astand-by agreement
withtheIMFin1992. Since 1994totalexternal debthasrisenmainly duetoborrowing frommultilateral
andbilateral lenders (Chapter II).
(3) Developments inMerchandise Trade
23. Followingthetradeliberalizationeffortsoftheearly1990s(ChapterIII)andtherealappreciation
ofthecurrency, noted earlier, agrowing merchandise trade deficit, particularly withMERCOSUR
partners, hasemerged. Therisein(largely unrecorded) re-exports ofgoods toneighbouring countries
upto1995, wasbalanced bynegative developments inworld commodity prices, andthecutbackin
receipts fromshopping tourism, andtherewasalsoamajor improvement intherecording ofimports.
Thesmall decline inthedeficit in1996 isexplained byareduction inimports associated withthe
continuing domestic recession andtheincrease invalue ofsoybean exports.WT/TPR/S/26
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24. Trade statistics donotaccurately reflect trade flows because ofunregistered trade withBrazil
andArgentina aswellastheweaknesses ofthedomestic statistical service. Unregistered flows include
imports andre-exports (ofmachinery, vehicles, spare parts, alcoholic beverages, perfumes, electronic
goods, tobacco) mainly related toshopping tourism, aswellasunauthorized tradeincertain agricultural
andforestry products (Chapters IIIandIV). Trade inre-exported goods isestimated atbetween
US$3 billion (estimates bytheChamber ofCommerce ofCiudad delEste)andUS$12 billion (Brazilian
Customs estimates).13Despite forecasts ofadecline inshopping tourism operations asaresult of
MERCOSURcommitments,nosuchtrendisyetapparent,probablybecauseofthesubstantialdifferences
indomestic indirect taxes.
(i) Composition oftrade
25. Since 1989 Paraguay 'sreported merchandise trade structure hasnotchanged significantly
(Chart I.4). Domestic exports remain highly concentrated incertain commodities whose tradeweight
varies according todomestic output anddevelopments inworld prices; inthiscontext, theshare of
soybeans andcotton inthetotaldeclined bymore than21percentbetween 1989and1995(Chart I.4).
Inthesameperiod, theshare offoodintotalimports rosesharply, while theshare offuelintotalimports
declined.
(ii) Direction oftrade
26. Regional trade hasgained importance inthelightoftheimplementation ofregional trade
liberalization commitments (Chapter II);in1995 more than43percentofParaguay 'simports came
fromotherLatin American partners which wereinturnthedestination ofabout twothirds ofitsexports.
Between 1991and1995there wasa27percentincrease intheshare oftotalimports fromtheregion
andtheirvalue almost tripled toUS$1.3 billion; thelarger partoriginated inMERCOSUR andother
LAIA countries, mainly Chile (Chart I.5). Theshare ofexports totheregion relative tototalexports
roseby38percent, mainly duetotherapid growth ofexports toMERCOSUR partners.
27. Individually, Brazil isParaguay 'smost important trading partner (Chart I.6). Under
MERCOSUR, Argentina andBrazil havebecome evenmore important assuppliers andexport markets
(including forcotton). TheEuropean Union isamajor export market forsoybeans, butsince 1989,
itsshare inmerchandise tradehasdropped slightly. Theshare ofimports fromAsian countries (mainly
China) hasrisen sharply inthesame period.
13EIU(1995c), p.42; EIU(1996b), p.26; World Bank (1994a), p.89.WT/TPR/S/26
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WT/TPR/S/26
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28. Paraguay'soverallmerchandisetradedeficitwithotherLatinAmericanpartnershasprogressively
increased fromabout US$276 million in1992 toUS$909 million in1995.14Thiswasmainly dueto
rising recorded tradedeficits withMERCOSUR partners andChile. However, therecorded tradedeficit
doesnottakefullaccountofunregisteredre-exportsrelatedtoshoppingtourism;theauthoritiesindicated
that22percentofregistered imports arere-exported.
(4) Trends andPatterns inForeign Investment
29. Following the1989 reforms (including theintroduction ofinvestment incentives), the
establishment ofMERCOSUR, andtheintroduction oflegislation onfree-trade zones, foreign direct
investment (FDI) hasrisen. According tobalance-of-payments data, annual FDIinflows exceeded
US$200 million bothin1995 and1996.
30. Recent FDIinflows havealsobecome more diversified (Chart I.7). Thesectoral pattern of
inflows seems tohavemoved away fromtraditional industries (e.g., agro-industry) andspread toother
sectors including services. Industrial investment andagricultural expansion werethemainsectors for
newFDIin1996; these included investment inaUS$500 million cellulose plant, metal alloys and
anatural gaspipeline (tofuelfertilizer andmethanol plants).15Inaddition tonewFDIinflows and
re-investment ofprofits, loans from abroad havealsoincreased (Chart I.8).
31. Inrecent years, foreign direct investment hasoriginated mainly intheEU(France, Germany
andtheUnited Kingdom) andMERCOSUR countries, mainly Brazil (Chart I.7);in1994theirshares
corresponded to37.5percentand24.3percentoftotalinflows. Between 1992and1994other major
foreign investors included Switzerland andtheUnited States.
32. Chinese Taipei isalsoanimportant investor inParaguay. In1996several State-run firms from
Chinese Taipei wereplanning toinvest inParaguay (steel, electricity) while 72private companies from
thesame source were behind aUS$150 million industrial parktobeoperational bymid-1997. The
parkisexpected togenerate exports ofUS$400 million ayear, mainly destined fortheMERCOSUR
market.
33. Inaddition tolowlabour andenergy costs, participation inanenlarged MERCOSUR market
andplans forgreater involvement oftheprivate sector incertain public services areexpected tomake
Paraguay more attractive toforeign investors. Problems related topoorinfrastructure inareas such
astelecommunications andtransport aretobetackled withde-monopolization andincreased public
spending inpublic works, asdiscussed above. Animproved legislative framework forassembly
operations wasexpected tobeapproved bymid-1997.
14UNSTAT, Comtrade database.
15EIU(1997), p.31.