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IV. TRADE POLICIES AND PRACTICES BYSECTOR
(1) Overview
1. Overall, thereissignificant dispersion inprotection across sectors, withprocessing industries
benefiting fromhigher nominal protection through tariffescalation. Thissituation willlargely remain
unchanged under thefullyapplied MERCOSUR customs régime. Afewborder measures persist, either
toprotect domestic agricultural producers (now intheform oftariffs only) orforhealth and
environmental reasons. Despite efforts toincrease theparticipation oftheprivate sector incertain
economic activities, State involvement continues incertain manufacturing andkeyservices sectors.
Resulting inefficiencies, aswellaspoorinfrastructure, haveconstituted aconstraint onParaguay 's
efforts todevelop amore competitive industrial sector aswellasalimitation toitsexport potential.
2. TheagriculturalsectorremainsoffundamentalimportancetotheParaguayaneconomy.Although
itscontribution toGDP hasdeclined slightly inrecent years, itstillgenerates, directly orindirectly,
thelargest partofmerchandise exports. Government intervention toprotect domestic producers and
toencourage cropdiversification, sectoral modernization, domestic processing andmarketing seems
tobeofminor importance. Since January 1995, import protection, intheform oftariffs, including
seasonal duties, hasbeenconfined toafewcashcrops andnon-processed items withaviewtoensuring
theabsorption ofdomestic production. TheGovernment ensures thesupply ofcheap, short-term credit
andafewfiscal concessions, buthasresisted pressure fordirect subsidization andtheestablishment
ofguaranteed producer prices. Ithasnotyetproceeded withthepolitically sensitive landreforms and
hasdelayed theapplication offiscal incentives forrational useofland. Measures suchaswriting off
unpaid debts andperiodic freedistribution ofseeds havebeenreserved largely forcotton. Inrecent
years restrictions havebeenimposed ontheexport oflogsaspartofanattempt tolimitdeforestation,
butthisisalsolikely tobenefit domestic sawmillers orencourage unauthorized exports.
3. Intheenergy sector, State involvement remains pronounced. Inrecent years, asaresult of
theexploitation ofhydroelectric power resources, electricity generation hasbecome averyimportant
central government revenue source; inthelightofpossible output expansion, thesector appears to
havegreatpotential asaforeign exchange earner. Efforts arebeing made toattract electricity-intensive
industries, andplans areunder waytoencourage private sector participation inpower generation and
distribution.AStatefirmrunsanincreasinglycostlyfuel-alcoholplant,aswellasimportingandrefining
most fuels.
4. Manufacturing islargely based ontheprocessing ofagricultural commodities. Direct assistance
largely takes theform ofsubsidized credit. State-owned enterprises operate insteel, cement and
fuel-alcohol production. There isconsiderable dispersion intariff protection forthemanufacturing
sector, withprotection forfood, beverages andtobacco, textiles andleather, wood andfurniture, and
transportequipmentsubstantiallyexceedingtheoverallaveragerate(ChartIV.1,TablesIV.1andAIV.1).
Thehighest average tariffrates(ranging from18to22percent)apply tosoftdrinks, carpets andrugs,
knitting, textile articles, footwear, leather products, containers ofpaper and furniture
industries (Table AIV.1). By2006, when theMERCOSUR CETratesaretobefullyimplemented,
protection through higher thanaverage nominal tariff levels willbeavailable tothemanufacture of
food, beverages andtobacco, textiles, clothing andleather articles, metal manufactures, machinery,
andtransport equipment (Table AIV.1). Asdiscussed earlier (Chapter III(2)(ii)(c)), thegenerally
pronounced tariffescalation pattern istoremain relatively unchanged under MERCOSUR (Tables IV.1
andAIV.1).WT/TPR/S/26
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Table IV.1
Main features oftheParaguayan tariff schedule, 1997 and2006
1997 2006
Simple
average
tariff
(ad
valorem
per
cent)Tariff dispersionSimple
average
tariff
(ad
valorem
per
cent)Tariff dispersion
Tariff
range
(ad
valorem
percent)Std.
dev.aCoefficient
of
variationaTariff
range
(ad
valorem
percent)Std.
dev.aCoefficient
of
variationa
Alltariff lines 9.6 0-25.2 6.8 71.0 11.1 0-20 6.2 56.2
Bysector:b
Agriculture andfisheries 7.6 0-24.2 5.3 70.4 7.1 0-16 4.1 58.0
Mining 3.3 0-10.0 1.9 57.9 3.3 0-10 1.9 57.9
Industry 9.8 0-25.2 6.9 70.1 11.4 0-20 6.2 54.5
Bydegree ofprocessing:
Primary products 6.7 0-24.2 5.2 76.9 6.4 0-20 4.3 67.7
Semi-processed products 8.9 0-23.9 6.1 68.7 9.3 0-18 5.7 61.7
Finished goods 10.7 0-25.2 7.4 68.9 13.1 0-20 6.0 45.8
a Thestandard deviation measures theabsolute dispersion ofadistribution; thecoefficient ofvariation isameasure ofrelative
dispersion, defined asthestandard deviation divided bytheaverage.
b Based onISICclassification.
c Asindicated inchapter III(2)(ii)(b) theseparate schedule forcompliance withCETratesfortheautomobiles sector isnottaken
intoaccount.
Source: WTO Secretariat.Paraguay WT/TPR/S/26
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5. Competition isexpected tointensify intheParaguayan market astariff protection onimports
ofsensitive items originating inMERCOSUR countries isprogressively eliminated bythe
year2000 (Chapters IIandIII).TheMERCOSUR integration process, particularly aftertheelimination
ofthese tariff barriers, isexpected toentail some structural adjustment.
6. Paraguay remains highly dependent ontraditional export items likecotton, soybeans, meat
andwood. Inrecent years thevalue ofsuchtradehasfluctuated considerably. Lower export volumes
andworld prices forthese items sawthevalue ofsuchexports decline in1990-92, risein1993-94
andstagnate in1994-95 (Chart IV.2). Between 1990and1995, theshare oftraditional items intotal
recorded exports fellby20percentto64percent1,while thetotalvalue ofrecorded exports alsofell
byabout 15percent. In1996, recorded exports attained arecord level ofmore thanUS$1 billion
(exceeding by9.3percenttheir1990 level); thiswasmainly duetosoybean earnings which ledto
ariseintheshare oftraditional items toabout 67percentoftotalrecorded exports.2
7. More than halfofGDP isgenerated bytheservices sector; aleading activity is
commerce (including shopping tourism). Paraguay 'scommitments inthecontext oftheGeneral
Agreement onTrade inServices appear tocover fewsectors, andlittleinterest hasbeenexpressed
inparticipating innegotiations inspecific services sectors. Since 1996, thebasic legal framework
ofthefinancial sector hasbeenupdated; itistobefurther expanded tocover newfinancial products.
1According totheCentral Bank ofParaguay, in1995 thelowvalue ofexports ofwood andsoybeans was
duetowidespread under-invoicing attherequest ofimporters inneighbouring countries.
2These datadonotappear toinclude re-exports, which areimportant inParaguay (Chapter I).WT/TPR/S/26
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Efforts toreduce Stateinvolvement intelecommunications andrailtransport services, sectors whose
inefficiency hasbeenadeterrent toeconomic development andforeign investment, areunder way.
Cargo reserve requirements areinforce inshipping services. State companies arealsoengaged in
portandairport services. Inanumber ofareasinadequate orpoorly maintained facilities impose severe
constraints onthedevelopment oftrade.
(2) Primary Industries
(i) Agriculture andlivestock
8. Since 1990thecontribution oftheagricultural andlivestock sector toGDPhasdeclined slightly
toabout 24percentofGDP in1996.3Nomajor changes occurred intheproduction pattern
(Chart IV.3). Theagricultural sector employs more thanathird oftheworkforce andgenerates
90percentofrecorded exports; thewell-being ofthesector iscrucial tothecountry 'seconomic
development andthewelfare ofalarge partofthepopulation.4
9. Paraguay islargely self-sufficient inbasic foodstuffs, withsurpluses ofmany commodities
being exported. From 1990to1995, exports contracted bymore than8percentayear,partly because
3Banco Central delParaguay (1997).
4World Bank (1995).Paraguay WT/TPR/S/26
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offalling prices andlower demand foritems suchascoffee (re-exports), cotton, soybeans andwheat.5
Agricultural andlivestock imports grewmore thantenfold between 1990and1994, mainly duetocattle
imports.
10. Noframework lawonagriculture exists. TheEconomic Cabinet defines policy inthisarea.
Since 1992, cropdiversification policies havebeenpursued aimed atstimulating sustainable sectoral
growth, creating jobsinrural areas andreducing poverty inthese areas. Support toproducers has
beenavailable mainly intheform ofcredit, technical assistance andmarket information.
11. Overall, itseems thatthereisonlymodest government intervention inagriculture.6Although
average effective ratesofprotection fortheagricultural sector asawhole arepositive, effective rates
forimportables werenegative (-219.4 percentin1991and-40.3 percentin1993), while exportables
hadpositive effective protection (24.8 percentand18.9percentin1991 and1993, respectively).7
These computations takeaccount ofallforms ofintervention, notonlytariffs.
Border measures
12. In1997, average nominal tariff protection forthesector was7.6percent, compared with
9.6percentforallgoods (Table AIV.1); under theprocess ofconvergence totheMERCOSUR CET,
tariffprotection isscheduled todropto7percent. Import restrictions applied tosensitive items like
cotton, soybeans, sugar, wheat andother agricultural items thatareproduced domestically, were
converted intotariffs fromJanuary 1995, inconformity withMERCOSUR andWTO commitments.
13. Asdiscussed earlier (Chapter III,sections (2)(ii)(d) and(4)(i)), intheUruguay Round Paraguay
bound itsentire tariffschedule without having recourse to"tariffication" (i.e.,conversion ofnon-tariff
measures tocustoms duties); ithasthusforgone therighttousemarket access limitations intheform
ofSpecial Safeguards ortariffquotas allowed under theWTO Agreement onAgriculture. Furthermore,
asnodomestic orexport subsidies (subject toreductions) areindicated initsSchedule ofConcessions,
thegeneral rules onDomestic Support Commitments (deminimis percentage) andExport
Subsidies (prohibition) ofthisAgreement apply.8
14. Tariffprotectionfor77eight-digitHSitemsfromotherMERCOSURcountriesistobegradually
phased outbytheyear2000 (Chapter IIandChapter III(2)(ii)(i)); imports fromthirdcountries will
thenbesubject toCETrates.9These sensitive items, which in1997aresubject todutyratesranging
from7percentto21percent,comprise meat(bovine, swine, poultry), ham, sausages, milk, honey,
5UNSTAT, Comtrade database.
6World Bank (1995), p.4.
7Valdés (1996), pp.20,23and27.
8More specifically, thegeneral provisions onDomestic Support Commitments allow developing countries
toexclude from thecalculation oftheirCurrent Total Aggregate Measurement ofSupport andtoexempt from
reductions ademinimis percentage of10percentofthedomestic support toproducers (paragraph 4(b)of
Article 6).Notwithstanding Article 9.4provisions, export subsidies notspecified intheSchedule ofConcessions
areprohibited (paragraph 3ofArticle 3).
9Lista deAdecuación -Paraguay annexed toDecree 12056, 29December 1995.WT/TPR/S/26
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tomatoes,onions,garlic,carrots,bananas,pineapples,oranges,mate,rice,vegetableoils(fromsoybeans,
groundnuts, palm, cotton seed, coconut, maize), peas, jam,coffee, tomato ketchup, grape wine, beer,
ethyl alcohol, vinegar andcigarettes.
Land
15. Land under exploitation isequivalent to59percentofthenational territory. Between 1981
and1991 landunder cultivation increased by82percentto4million hectares; these were mainly
allocated tosoybeans, cotton, maize, manioc, wheat andsugar. Some 18million hectares arededicated
topasture, woods andforest.
16. State-owned landavailable forcolonization wasexhausted inthemid-1980s. While thishas
ledtoconstitutionally mandated landexpropriation andre-distribution (Chapter II),these havebeen
resisted bythelandowners 'association (Asociación Rural delParaguay ).In1995, theapplication
ofanewtax(Impuesto alasRentas delasActividades Agropecuarias ,IMAGRO)designedtodiscourage
unproductive landholdings waspostponed forayearinresponse torepresentations concerning land
valuation criteria from theAsociación Rural ;thistaxhasbeenapplied since January 1996.10
Fiscal measures
17. Taxes directly affecting theagricultural sector include (i)therural realestate tax(Impuesto
Immobiliario Rural )atratesof0.5percentand1percentonthefiscal value ofland; and(ii)the
income tax(IMAGRO) based onapresumed level offarmincome, butexempting holdings ofless
than20hectares.11TheIMAGRO isinpractice aimed atmaking therealestate taxprogressive. The
livestock salestax(Impuesto aComercialización Interna deGanado Vacuno )wasabolished uponentry-
into-force ofIMAGRO. Inaddition, plans onspecial fiscal arrangements forthelivestock sector were
notified totheWTO in1995.12
18. First-stage transactions inagriculture areexempt from VAT, while processed products are
fullytaxed.13InMay1996theIMFreportedly suggested totheauthorities toconsider theexpansion
ofVAT coverage totheentire agricultural output (Chapter I).
Subsidized credit
19. Theagricultural sector hastraditionally beenthemainrecipient ofsubsidized credit, withthe
exception ofashort period between 1988 and1993 when itsshare inoutstanding banklending was
drastically reduced by40percentto23percent.
10IMAGRO, established under Law 125/91, wastoenter intoforce inJanuary 1995 (Decree 7127,
30December 1994; Decree 10801, 3October 1995).
11World Bank (1995), p.5.
12Information supplied byParaguay cited inGATT document L/7210, 30April 1993; andWTO
document IMA/INV/3, 20June 1995.
13Reportedly, this exemption reflects difficulties and costs incollecting taxes from small
producers (World Bank, 1994a, p.29).Paraguay WT/TPR/S/26
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20. In1992anexceptional Economic Recovery Programme wasadopted, interalia,toencourage
cropdiversification, aswellastohelpfarmers overcome theeffects offalling international prices for
cotton andtheappreciating realexchange rate. Credit atasubsidized rateof15percentwasmade
available fortherefinancing ofunpaid debts ofcotton, soybean andriceproducers, andfornew(seeding
season) credits tocotton, soybean andwheat producers.14
21. Atpresent credit programmes ofState-owned banks (e.g., Banco Nacional deFomento (BNF) ,
Crédito Agrícola deHabilitación (CAH)), largely financed bytheCentral Bank, helpfarmers tofinance
thepurchase ofseeds, agri-chemicals andequipment (e.g., tractors) specific production activities
(e.g., harvesting, processing andmarketing) ortore-finance theirdebts atpreferential rates. Most
oftheloans areshort-term andseasonal. Legislative provisions allow forunpaid debtforgiveness;
thiswaslastauthorized in1995atthesectoral level(targeting associations, small producer committees
andcooperatives), tocover CAH'sloans uptoatotalofabout US$190,000.15
22. Crop selection isdetermined, interalia,bycredit availability; theState-run andother banks
provide credit forcertain items, depending ontheireconomic importance.16Theability todiversify
production beyond thetraditional crops maybeinfluenced bysemi-formal lenders andintermediaries
whoprovide credit tosmall farmers, unable toobtain official credit, forplanting cotton orsoybeans.
Lack ofadequate finance forthepurchase ofinsecticides andother inputs canalsoaffect yields and
production costs.
23. Loan conditions, terms andtotalfunding under official credit programmes tothesector vary;
thebeneficiaries aresmall producers inruralareas. Atpresent, thepreferential annual ratesapplied
inmost ofthecases are19percent(general) and3percent(interest onarrears), much lower than
commercial rates.17In1993, 50percentofcentral government budget spending fortheagricultural
sector wasdestined tofinance agricultural credit programmes oftheFarming Development Fund(Fondo
deDesarrolloCampesino),theNationalDevelopmentBank(BNF),thesmallholderCreditAgency(CAH)
andtheLivestock Fund (Fondo Ganadero ,FG); 30percentfordebtservicing; and20percentfor
research, training, marketing andtheagrarian reform programmes. In1995 these credit institutions
provided loans exceeding US$160 million most ofwhich were channelled tosoybean andcotton
producers.18
Other types ofassistance
24. Tostrengthenthecooperationbetweenproducersandagro-industries,theMinistryofAgriculture
andLivestock publishes, onamonthly, weekly ordaily basis, producer, retail orexport prices for
14World Bank (1994a) pp.vii and73;Decree 14713, 31August 1992; andDecree 15151, 16October 1992.
15Law551of1975; Decree 12051, 29December 1995. More information ontheutilization ofthismeasure
maybefound insection (2)(i)(a).
16World Bank (1995), p.6.
17Forexample, asfrom January 1997, these have been CAH'sloanconditions forallloans toproducers in
rural areas; inaddition thefinancing ofpurchases ofagricultural machinery andequipment benefited from a
one-year grace period, 10percentannual interest, andamaximum reimbursement period offiveyears (CAH
Resolutions 2,5and6,3January 1997).
18Ministerio deAgricultura yGanadería (1995), p.24.WT/TPR/S/26
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awide range ofitems including bovine meat, milk, milkproducts, fruitandvegetables aswellas
agricultural inputs.19Indicative market prices aremaintained forcotton.20TheGovernment also
participates asamediator between producers andagro-industries incotton andoilseeds.
25. In1995, several support programmes fortraining, purchase andinstallation ofequipment,
environmental protection andreforestation were carried outwithdomestic orinternational finance
resources; theirtotalcostexceeded US$215 million.21Inaddition, anumber ofprojects, withatotal
costofmore thanUS$400 million, wereunder preparation byMAG, including asectoral reactivation
programme fortheperiod 1996-98; ajointproject withtheWorld Bank oninvestments forsustainable
rural development fortheperiod 1996-2001; andanumber ofproduct-specific cultivation projects
(e.g., grapefruit, sugar cane, rice,tomatoes, bananas, beans).
Plans
26. Reportedly,theGovernmentandtheprivatesectorhavebeenjointlyexploringoptionstopromote
agricultural diversification, aswellastoimprove methods ofcultivation oftraditional crops inorder
toincrease employment andoutput. Inmid-1996, theMAG waselaborating aproject foragricultural
andforestry modernization withaview toadapting institutional structures tosocio-economic and
environmental challenges faced byParaguay.22Poverty inruralareas constitutes another concern of
theGovernment.
27. Arecent World Bank report, recognizing therôleoftheagricultural sector incatalyzing the
growth oftheentire economy, suggests theneedforashifttowards theintensification ofresource use
rather thanthecontinuous expansion ofagricultural land.23Itsuggests along-term strategy which,
interalia,focuses onraising flexibility inresource allocation; promoting forms andsizesoflandholding
which maximize output; andintegrating agricultural production withagro-industry tomaximize the
value added inParaguay.
(a) Cotton
28. Some 18to20percentofthepopulation depends oncotton production, which ismainly carried
outonsmall family-owned farms where harvesting isalmost exclusively byhand. Mechanization is
taking place slowly; atpresent, only7percentofcotton production, covering 15,000 hectares, seems
tobemechanized, while another 20,000 hectares aretobemechanized in1997.
29. Inthe1990s, theproduction ofthetwocashcrops (cotton andsoybeans) hassuffered from
acombination ofdrought, lower world prices, anovervalued currency, higher production costs and
19Ministerio deAgricultura yGanadería (1995).
20World Bank (1995), p.4.
21Ministerio deAgricultura yGanadería (1995).
22Informe delExcelentísimo Señor Presidente Constitucional delaRepública delParaguay AlCongreso
Nacional ,1July1996, p.21.
23World Bank (1995), pp.i-ii.Paraguay WT/TPR/S/26
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reduced availability ofcredit from cotton seedmerchants (duetotheirpoorperformance asginners '
suppliers) inthewake ofthefinancial crisis (Chapter Iandsection (5)(ii)).24
30. Between 1990 and1995 thevolume ofrawcotton production fluctuated considerably, from
apeakof631,728 tonnes in1991toaslittleas379,877 tonnes in1994(Chart IV.4).25Consequently,
asillustrated inChart IV.5, changes inproductivity indicators havealsobeenabrupt.
31. In1994, Paraguay wastheworld 'ssixthlargest exporter ofcotton fibre.26From 1990to1994,
thevolume andvalue ofcotton exports fellprogressively byabout 60and56percent, respectively;
in1995 exports recovered, butremained below the1993 level.27
24Paraguayan cotton isconsidered ofhighquality andisquoted separately ontheLiverpool market. Inrecent
years, climatic conditions have affected itsquality.
25Theestimate isbased onfigures contained inBanco Central delParaguay (1996b), p.36.
26United Nations (1995), p.54.
27Theestimate isbased onfigures contained inTable 19ofBanco Central delParaguay (1996c).WT/TPR/S/26
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32. There isperiodic Government intervention inthesector. Forexample, thesubstantial fallin
earningsin1992gaverisetoGovernmentpoliciesencouragingcropdiversification,asdiscussedearlier28,
andimport restrictions werereplaced bytariffs in1995. Duty-free importation ofcotton forprocessing
bylocalginners mayalsobeauthorized under thetemporary admission régime (Chapter III);in1996
100,000 tonnes ofrawcotton (13,667 from Argentina) wasallowed. Theauthorities indicated that
thelowvolume allocated toArgentina ismainly aresponse torequests bythatcountry, resulting from
industrial andsocial demands. Inaddition, transport costs (seesection (5)(iv)) andslow customs
procedures onbothsides ofthefrontier seem tooperate asanimpediment tothistrade, increasing
thecostofdoing business.
33. Inrecent years, domestic cotton production hasbenefited fromaseries ofgeneral (e.g., credit
supply) andsector-specific measures suchasdebtwrite-off andfreedistribution ofcotton seeds; and
consideration hasbeengiven totheadoption ofother measures.29Inthe1995/96 season, governmental
assistancetosmallcottonproducersintheformofcreditandinputs(e.g.,seeds,agri-chemicals),covered
75percentofthesown area.
28World Bank (1995), p.4.
29Forexample, inmid-March 1996, approval wassought fromtheCongress forgranting agovernment direct
subsidy ofG/100(US$0.05) perkg.forproducers ofcotton seed; nevertheless, theproject wasshelved because
theLower House refused toapprove itduetouncertainty whether thesubsidy would reach growers (EIU (1996c,
p.32). Atthesame time, farmers called onthegovernment toguarantee minimum farm-gate prices forcotton
producers (EIU (1996d, p.22).Paraguay WT/TPR/S/26
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34. Asaresult ofthe1995banking crisis (Box IV.2) andrecent government policy ofnotproviding
indirectly lowcostcredit viatheginners, theState-owned bankCAH hasbecome amajor source of
credit supply tothecotton growers. Forthe1996/97 croptheSate-owned BNFbankalsodisbursed
US$50 million, ofwhich US$25 million were directed tosoybean andcotton production.30
35. Forgiveness ofinterest arrears tocotton farmers seems tohavebeenthegeneral ruleinrecent
years.31Since 1994, duetoemergency circumstances, interest arrears onCAH loansfrom1990onwards
ofcotton producers havebeenforgiven andterms havebeenrenegotiated toinclude preferential interest
rates(15percentforrenegotiated debtand20percentforloans expiring inJune1994).32In1995
BNF wrote-off US$50 million ofoverdue interest forcotton producers. In1996, theCAH was
authorized toforgive unpaid interest ondebtowed bycotton producers uptoatotalamount ofabout
US$2 million.33
36. Since 1995there hasbeenlegislative provision forthefreedistribution ofseeds tofarmers.34
Thishasbeenused, interalia,asanincentive tofightplantdiseases; inreturn, thebeneficiaries have
topulloutandburntheiroldplants. TheCAH isentrusted withtheadministration, distribution or
salesofseedsupplies; in1995, seeds weresoldatafixed priceofG/53,300 (US$27) perbag(useable
foronehectare). InOctober 1996, theMAG supplied some 180,000 bagsofcotton seedtofarmers
affected byheavy rains.
37. Inrecent years, high-quality cotton seedhasbeenimported tohelpraiseproductivity; this
isexpected toincrease output perhectare by10percenteachyearbytheyear2000.35Inaddition,
thepoor1995/96 cropforced theimportation ofcotton seedtomeetthe1996/97 planting targets.
(b) Soybeans
38. Paraguay isamajor world producer andexporter ofsoybeans.36Contrary tocotton, soybean
production takes place onlarge estates. Between 1990 and1995 thevolume ofproduction grew by
morethan67percent(ChartIV.4),mainlyasaresultofproductivityincreases(ChartIV.5).37However,
theareaundercultivationhasalsobeenextended,andexceeded1millionhectaresin1996.Itisexpected
thatthe1996/97 cropwillreach anewproduction record of2.75million tonnes. Moreover, production
30Secretaría Técnica dePlanificación delDesarrollo Económico ySocial (1996), p.4.
31Under Article 6oftheWTO Agreement onSubsidies andCountervailing measures, direct forgiveness of
debtisconsideredasanactionablesubsidywhichmaycauseseriousprejudiceinanexportmarket.Theauthorities
indicated totheSecretariat thatduenotehadbeen taken ofthisprovision prior totheadoption ofthemeasure.
32Decree 3069, 11April 1994.
33Law 997, 3December 1996; (AHResolution 3,3January 1997).
34Law662,22August1995;MAGResolutions634,6September1995,and663,19September1995,affecting
the1994/95 and1995/96 crops.
35EIU(1996c), p.32; EIU(1996a), p.32.
36United Nations (1995), p.54.
37Theestimate isbased onfigures contained inBanco Central delParaguay (1996b), p.36.WT/TPR/S/26
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isprojected tocontinue rising tosome3million tonnes bytheyear2000asaresult offullmechanization
andtheintroduction ofmodern methods ofcroprotation.38
39. There hasbeensubstantial increase indomestic processing inrecent years. Themajor change
occurred in1991when theMarangatú oilseed plantbegan operations. By1996, 67percentofsoybean
production wasexported unprocessed, 31percentprocessed locally and2percentretained forseed.
In1996, international prices raised thevalue ofsoybean exports torecord levels; theexpected
25percentriseisduetotheswitch byfarmers tosoya-based feedstuffs fromfeedthatcontains animal
parts. Soybean production doesnotseem tobenefit from anyspecific assistance measures.
(c) Wheat andsugar cane
40. Between 1993and1995thevolume ofwheat production fellby50percentasaresult ofadverse
climatic conditions.39However, the1995/96 harvest wasmore thandouble thevolume oftheprevious
year; similar levels were expected forthe1996/97 crop.
41. Inthepast,domestic producers benefited fromhigher thanworld prices asaresult ofimport
restrictions andother arrangements which obliged localmillers tobuydomestic production40,butthis
requirement nolonger exists. Likeother crops, wheat production currently benefits fromthegeneral
credit programme; forthe1996/97 crop, theState-owned bankBNFdisbursed US$22.5 million to
some 2,000 farmers. Poorclimatic conditions haveobliged Paraguay toimport wheat inrecent years;
in1995, theduty-free importation of150,000 tonnes wasauthorized inorder tomeetdomestic demand.
42. Between 1993 and1995 sugar caneproduction forindustrial usedeclined bymore than
8percent,while in1996itreturned toaround the1992level; asindicated inChart IV.5, productivity
remained relatively stable.41
43. Sugar iscurrently excluded frominternal freetrade within MERCOSUR; itistobebrought
under thecommon MERCOSUR tariff régime by2001. Since 1995, sugar hasbeensubject toa
30percentm.f.n. rateaffecting intra- andextra-zone trade, thehighest applied byParaguay. The
State-ownedfuelalcoholplantabsorbspartofdomesticproduction(section(2)).AG/2.4billionfive-year
programme forthecanesector wasintroduced in1996 toraise production andproductivity. The
programme, runbyMAG, consists ofintroducing newvarieties, increasing credit availability, and
improving production andmarketing procedures aswellasresearch andtechnology transfer activities.
44. Since 1995, sugar exports totheUnited States havebeensubject toatariff quota régime,
negotiated onanannual basis. Thisallows Paraguay toexport sugar totheUSmarket atprices that
aresubstantially greater thanworld market prices; itsannual quota isapproximately 8,500 tonsand
isallocated toexporters onthebasis oftheirhistorical share ofdomestic production.
38EIU(1996a),p.33;andforecastsofthesoybeansexporters'association(CámaraParaguayadeExportadores
deCereales yOleaginosas ,CAPECO) cited inEIU(1996c), p.33.
39Banco Central delParaguay (1997).
40World Bank (1995), p.5; EIU(1996d); Secretaría Técnica dePlanificación delDesarrollo Económico
ySocial (1996), p.4.
41Theestimate isbased onfigures contained inBanco Central delParaguay (1997).Paraguay WT/TPR/S/26
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(d) Livestock
45. Between 1990and1995, cattle andlivepoultry numbers increased steadily by45percentand
58percent,respectively. Thegrowth inthesizeofthecattle herdwaspartly related tothesubstantial
reduction inbeefexports, which fellto25percentof1990 levels by1995.42Theconclusion ofthe
Uruguay Round raised hopes thatParaguay would beabletoresume exports totheEU,andin1996,
theEUgranted Paraguay a1,000 tonne quota forhighquality Hilton beef,allowing exporters toreceive
US$9,000 pertonne, twice thepriceforotherbeefexports totheEU.However, theauthorities indicated
thatthequota maynotbefilled following thereductions inEUmeatconsumption resulting from"mad
cowdisease". Since September 1996, Paraguay hasqualified asfreeoffoot-and-mouth disease, and
thisisexpected tohelpboost export salesofprime cuts.
46. Thelivestock sector hasaccess tocredit withthebanking institutions discussed earlier. As
from December 1995, under afive-year US$12.5 million project forlivestock development for
small-andmedium-sizeproducers,concessionalloanshavebeenextendedwiththeobjectiveofimproving
production structures andtechnology aswellasraising productivity; inaddition tolivestock,
fish-farming, andproducers ofother species ofeconomic interest maybenefit from thisfacility.
Conditions include a24percentinterest rate(replaced bytheinflation rateifhigher), uptotwoyears
ofgrace, andamaximum ofsixyears ofreimbursement. Despite Paraguay 'snotification totheWTO,
theauthorities indicated thatnopreferential loans havebeenavailable tothesector since 1989.43
(ii) Forestry
47. Forestexploitationismainlytosupplythedomesticmarketwithunworkedlogrollsandfirewood;
roughlythree-quartersofthisoutputisforagriculturalandindustrialuse,includingcharcoalproduction.44
Between 1990and1995, theregistered production oflogsandfirewood grewbymore than14percent
and17percent, respectively.
48. Theperennial forest cover ofeastern Paraguay fellfrom8million hectares in1945to2million
hectares in1994, when theexportation ofallunprocessed species wasbanned.45Between 1990 and
1994 recorded exports ofwood almost doubled, butadecline of24percenttoUS$56 million was
registered in1995.46However, theillegal cutting andburning offorests andtheillegal export oflogs
toBrazil, remain important. TheWorld Bankestimates thatifthedeforestation rateremains unchanged,
then, intheabsence ofaneffective reafforestation programme, theprimary forest cover ofeastern
Paraguay willdisappear bytheyear2018.
49. In1973theregulatory framework forforestry wasstrengthened bymeasures comprising export
prohibitions (Chapter III(3)(ii)), taxconcessions, direct subsidies andthere-location ofprocessing firms.
Since then, replanting hasbeen compulsory andthree-year taxbreaks have been provided for
reafforestation investments (including plantation, conservation andmaintenance costs), subject to
42Theestimate isbased onfigures contained inTable 19ofBanco Central delParaguay (1996c).
43PartA(b.2) ofWTO document IMA/INV/3, 20June 1995.
44Theestimate isbased onfigures contained inBanco Central delParaguay (1996b), p.44.
45EIU(1995), p.36.
46Theestimate isbased onfigures contained inTable 19ofBanco Central delParaguay (1996c).WT/TPR/S/26
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maximum amounts which canbeexempt fromtaxation.47Tobenefit fromthese breaks, theNational
Forest Service must verify andcertify theinvestment costs.
50. Since1995,forestationandreafforestationhavebeenpromotedbysubsidies.Assistanceconsists
ofcovering 75percentoftheplanting costs (once) inpriority areas aswellasmaintenance costs (for
athree-year period); thecosts aredetermined annually (March) bytheNational Forest Service.48
51. Since 1994, theinstallation and/or operation ofwood processing plants located lessthan20km.
from theBrazilian border hasbeenprohibited, withaview tocombating woodsmuggling; existing
plants weregiven 180daystomove outofthezone.49However, inresponse topressure fromsawmills
located intheborder zone, afive-year transition period wassubsequently allowed fortheirre-location.
Furthermore, acooperation agreement against wood smuggling wassigned withBrazil in1994 to
strengthen border controls andforexchange ofinformation.50
(3) Energy
52. Although Paraguay imports allofitsoil,ithasreduced itsenergy dependence byexploiting
itshydroelectric resources andbydeveloping afuel-alcohol industry.
Hydrocarbons
53. In1995,anewhydrocarbonslawestablished"anattractivelegalframework"forprivateinvestors
interested inexploration andexploitation activities.51In1996, fivecompanies were prospecting in
Paraguay. In1989, apricederegulation process wasinitiated; however, diesel oilandgasoline prices
remain regulated bytheGovernment.
54. Asmentioned inChapter III(2)(iv), until1992allimports ofpetroleum andpetroleum products
weremade bytheState-oil company, Petróleos Paraguayos (PETROPAR), except thatliquefied natural
gasandaviation fuelcould beimported bytheprivate sector. Atpresent, PETROPAR meets
approximately90percentofdomesticdemandinfuels.Betweenmid-1995andmid-1996PETROPAR's
mainsuppliers ofpetroleum wereArgentina (79percent)andAlgeria (21percent); refining iscarried
outdomestically orinArgentina.52
55. Inaddition toitsoilrefinery, PETROPAR runsafuel-alcohol plant, using domestically grown
sugar caneasasource ofrawmaterials. Anumber ofmeasures havebeentaken tosupport production.
Forexample, sincethemid-1980s, fuelalcohol hasbeenmixed withgasoline forallpassenger vehicles.
47National Forest Service Resolution 18,23April 1979.
48Law 536, 16January 1995; andDecree 9425, 21June 1995.
49Law 515, 9December 1994.
50Law 751, 14November 1995.
51Law 779(LeydeHidrocarburos ),13December 1995; Informe delExcelentísimo Señor Presidente
Constitucional delaRepública delParaguay AlCongreso Nacional ,1July1996, p.42.
52Informe delExcelentísimo Señor Presidente Constitucional delaRepública delParaguay AlCongreso
Nacional ,1July1996, p.36.Paraguay WT/TPR/S/26
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State subsidies alsogrew tomeet thedecline inworld petroleum prices inthelate1980s, butno
information ontheextent ofthese subsidies wasmade available totheWTO Secretariat.53In1996
PETROPAR made maintenance investments tokeepthefuel-alcohol plantoperational soastosupport
1,200 localsugar caneproducers, whose cropisbought forsome US$3 million ayear. Thisdecision
wastaken despite theriseininput costs andtheplant'sdifficulties inselling itsoutput duetothe
shrinking vehicle fleetusing thistypeoffuel;inNovember 1996, theplantwasoperating at50percent
capacity.
56. Inmid-1996, acontract forthepurchase ofnatural gasfrom Bolivia andtheconstruction of
a900km.pipeline, were under preparation; Paraguay istobuy2.5million cubic metres aday.54
Electricity
57. Hydroelectric power isthemost important natural resource ofParaguay, which hasoneof
thehighest power potentials percapita intheworld.55Between 1980 and1992, energy production
increased byanannual average of51percent,andsince 1990 thecontribution ofelectricity toGDP
hasmore thandoubled to4.7percent.56Given thatitconsumes onlyasmall partofitsproduction,
Paraguay willexport itssurplus, becoming oneoftheworld 'slargest exporters ofelectricity. In1995
approximatelyUS$445millionor32percentoftotalcentralgovernmentrevenuederivedfromroyalties,
compensationpaymentsandotherrevenueassociatedwiththesaleofelectricityfromtheBrazil-Paraguay
Itaipu Binacional (IB)andtheArgentina-Paraguay EnteBinacional Yacyretá (EBY) plants. The
Paraguayan Government owns 50percentofthese plants.
58. Seventy-two percentoftotaldemand in1994wasprovided fromtheIBplant, thelargest such
scheme intheworld, which cameprogressively intooperation between 1983and1991. Plans toincrease
itsinstalled capacity areunder way.57Almost 90percentofParaguay 'sforeign exchange earnings
fromelectricity weregenerated bytheIBplant.58TheEBYplant, another joint-venture, istobefully
operational by1998. Plans existforasecond jointhydroelectric project withArgentina (Corpus Cristi
project), tobefinanced, builtandoperated entirely bytheprivate sector.
59. TheState-owned National Electricity Company (ANDE), aself-governing monopoly, has
regulatory powers overthesector andisalsoincharge oftransmission anddistribution operations.59
53Europa Publications Limited (1995), p.525; Informe delExcelentísimo Señor Presidente Constitucional
delaRepública delParaguay AlCongreso Nacional ,1July1996, p.37.
54Latin American Weekly Report, 19September 1996.
55Informe delExcelentísimo Señor Presidente Constitucional delaRepública delParaguay AlCongreso
Nacional ,1July1996, p.43.
56Banco Central delParaguay (1996b).
57Europa Publications Limited (1995), p.526; EIU(1996a).
58Theestimate isbased onfigures contained inTables 17and23ofBanco Central delParaguay (1996c).
59World Bank (1996), p.47.WT/TPR/S/26
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InrecentyearsANDE'sfinancialrequirementshavebeenmetthroughnon-operatingincome(i.e.,profits
and/or compensation from EBY andIB,andinterest income).60
60. Paraguay hasthelowest electricity tariffs within MERCOSUR. Nomajor price differentials
affect consumers, andtariffs aresetatbelow marginal production costs; inearly 1997, electricity
tariffs forresidential andcommercial consumers were2.1percentand4.8percenthigher thanthose
charged toindustrial users. Special tariffs were introduced in1994 toencourage theestablishment
ofelectricity-intensive industries.61Under anagreement withtheInter-American Development Bank
(IDB), tariffs arebeing increased progressively toreach 89percentofmarginal costs byJune1997.
Thesimplification ofthetariff structure, which consists ofseveral categories depending ontheusers,
isalsounder way.
61. Inlate1996,theauthorities,incooperationwiththeIDB,wereconsideringthede-monopolization
andrestructuring oftheelectricity sector; thiswould include therevision oftheexisting legalframework
andtheestablishment ofanindependent regulatory body.62ANDE 'srestructuring would require annual
investment ofUS$150 million foraperiod ofeight years; private investors aretobesought asthe
State doesnotintend togetfinancially involved. Thefullprivatization ofANDE isnotenvisaged.
(4) Manufacturing
62. Paraguay 'smanufacturing sector, dominated bysmall inward-oriented companies, isgeared
totheprocessing ofagricultural products.63Consequently, itsoutput hastended tofluctuate inline
withthefortunes ofagriculture andofthedomestic economy. Thecontribution ofmanufacturing to
GDP declined from16.1percentin1990to14.3percentin1996.64Inabsolute terms, value-added
declined inmost sectors (Table IV.2).
63. In1995, tenthree-digit ISICindustries wereresponsible for75percentofmanufacturing value
added; these were food andbeverages production (about 44percent), wood-processing (about
21percent) andtextiles, clothing andleather production (more than10percent).65Manufacturing
employed about 11percentofthelabour force in1995.
64. Between 1997and2006theestimated simple average m.f.n. tariff rateforthemanufacturing
sector istorisefrom 9.8to11.4percentasParaguay converges fullytoMERCOSUR 'scommon
external tariff(Table AIV.1). InDecember 1996, toprotect thedomestic footwear industry fromunfair
competition (under-invoicing, lowprices andsmuggling), importers ofsuchitems wereexcluded from
fiscal benefits under thetourism régime, discussed earlier (Chapter III(4)(ii)). Inaddition, in1995
forgonefiscalrevenuefromsalesofimportedfootwear,duetothisrégime,wasestimatedatUS$715,000.
60World Bank (1996), p.47.
61Decree 2109, 24January 1994.
62Informe delExcelentísimo Señor Presidente Constitucional delaRepública delParaguay AlCongreso
Nacional ,1July1996, p.42.
63World Bank (1995).
64Banco Central delParaguay (1997).
65Banco Central delParaguay (1996b), p.51.Paraguay WT/TPR/S/26
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Table IV.2
Manufacturing inParaguay, 1995
(Percentandvalue inUSdollars)
Activity Value added Change since 1990a
Total industries (G/million) 149,891 14.1
311 Food products other thanbeverages 34.7 37.4
312 Food industries 1.4 -42.5
313 Beverages 11.1 39.1
314 Tobacco 1.1 -24.2
321 Textiles 6.8 -14.1
322 Wearing apparel, except footwear 0.1 -78.2
323 Leather andfurproducts 4.1 127.1
324 Footwear, except rubber orplastic 1.3 -42.4
331 Wood products, except furniture 16.4 39.1
332 Furniture andfixtures, excl. metal 0.9 -17.9
341 Paper andproducts 0.0 -53.9
342 Printing andpublishing 5.2 72.9
351 Industrial chemicals 1.1 44.0
342 Other chemicals 1.2 -12.1
353 Petroleum refineries 4.2 -53.0
354 Misc. petroleum andcoalproducts
355 Rubber products 0.0 -8.8
356 Plastic products 3.0 81.5
361 Pottery, china, earthenware 0.0 -72.4
362 Glass andproducts 0.2 -60.2
369 Other non-metallic mineral products 4.6 19.9
371 Ironandsteel 0.2 -25.7
372 Non-ferrous metals 0.3 -25.0
381 Fabricated metal products 0.7 -59.6
382 Non-electrical machinery 0.1 -38.2
383 Electrical machinery 0.1 -58.2
384 Transport equipment 0.8 -51.1
385 Professional andscientific equipment 0.0 -91.2
390 Other manufacturing industries 0.4 -45.2
a Gross change between 1990 and1995 (provisional figures).
Source: Banco Central delParaguay, Boletín deCuentas Nacionales.
65. According totheauthorities, themanufacturing sector isatastage ofrapid modernization and
conversion toallow ittotakeadvantage oftheenlarged market opportunities within MERCOSUR.
Ontheother hand, adaptation totheduty-free régime within MERCOSUR mayhaveanegative effect
onthesector, withpossible joblosses among uncompetitive companies.66Thus, anextended period
hasbeenallowed fortheintroduction ofduty-free treatment ofsensitive items. Inparticular, tariff
protection forimports of354eight-digit HSitems fromotherMERCOSUR countries istobeeliminated
66Europa Publications Limited (1995), p.526.WT/TPR/S/26
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gradually bytheyear2000(Chapter IIandChapter III(2)(ii)).67These sensitive items, subject toduties
ranging from4percentto21percentin1997, include medicines, soaps, leather andarticles thereof,
travel goods, wood andpaper products, cotton, textiles andclothing, footwear, bottle andother
containers, ironorsteelrodsandwire, welding electrodes andfurniture.
66. Asdiscussed inChapter III(4)(i), finance provided byfinancial intermediaries (private or
State-ownedbanks)andtheNationalDevelopmentBanktothemanufacturingsectorischannelledthrough
theIndustrial Development Fund (FDI).68Between mid-1995 andmid-1996 FDIfunds wereusedto
finance fixed assets, working capital, industries andimports ofmachinery, equipment, rawmaterials
andinputs, of59firms helping tocreate 1,780 jobs. Overall, 17percentofBNF'sdisbursements
havebenefited 403firms, helping tocreate 1,176 jobs. Interest ratesstand atabout 11.5percentfor
FDIfunds denominated inUSdollars.69
67. However, inresponse totheliquidity problems oftheindustrial sector resulting fromthe1995
bankingcrisis(ChapterIandsection(5)(ii)ofthischapter),theboardofthesocialsecurityfund(Instituto
dePrevisión Social ,IPS)decided inearly 1996touseUS$42 million ofitsbankdeposits torefinance
debts by80manufacturing firms to16private banks.70Therefinance terms, consisting ofa
reimbursement period ofuptothree years ataminimum interest rateof24percent, seem tobe
substantially lower thancommercial rates.
68. Asdiscussed earlier (Chapter III(2)(iv)), there isstillState involvement intheproduction of
steel(Aceros Paraguayos ,ACEPAR) andcement (Industria Nacional delCemento ,INC). Most of
ACEPAR 'soutput isdestined fortheArgentine andBrazilian markets. In1995, government shares
inACEPAR wentonsaletothepublic, withapreferential option forpurchase byitspresent workforce;
theprivatization process hasnotbeenaccomplished yet.
(5) Services
69. Since 1990, theshare ofservices inGDP hasrisenslightly toabout 54percent(1996).71In
1996 commerce andfinancial services contributed more than25percentofGDP, equivalent tothe
agriculture andlivestock sector. Asshown inChart IV.6, commerce isbyfartheleading activity
inParaguay.
67Lista deAdecuación -Paraguay annexed toDecree 12056, 29December 1995.
68Informe delExcelentísimo Señor Presidente Constitucional delaRepública delParaguay AlCongreso
Nacional ,1July1996, p.33.
69ByFebruary 1997, average weighted interest rates were about 29percent(G/denominated loans) and
14percent(US$) (Banco Central delParaguay ,1997). More information oninterest rates canbefound in
BoxIV.1.
70EIU(1996c), p.26.
71Theestimate isbased onfigures which include construction andgovernment services butexclude electricity,
andarecontained inBanco Central delParaguay (1997).Paraguay WT/TPR/S/26
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(i) Commitments under theGeneral Agreement onTrade inServices
70. Paraguay 'sSchedule under theGeneral Agreement onTrade inServices (GATS) provides for
sector-specific commitments covering finance (insurance andbanking) andtourism (hotels, restaurants,
travel agencies, touroperators, tourist guides); theextent ofcommitments varyacross sectors, with
certain restrictions onmarket access andnational treatment intheareas ofcross-border supply,
consumption abroad andcommercial presence.72Nolimitations areplaced onthepresence ofsenior
personnel andspecialists.
71. Paraguay hasnotexempted anymeasures fromm.f.n. treatment asenvisaged under Article II
oftheGATS, buttheauthorities intend toinvoke GATS Article VonEconomic Integration toallow
forpreferential liberalization ofservices within MERCOSUR. National treatment isafforded to
authorized (cargo andpassenger transport) service suppliers onareciprocal basisamong Southern Cone
countries, butParaguay 'sGATS obligations, attheirpresent state, commit ittoproviding similar
treatment toallWTO members.73
72. Paraguay didnotparticipate intheWTO negotiations onmaritime transport services norin
thenegotiations onbasic telecommunications services; these agreements arebeing analysed atthe
72GATS/SC/68, 15April 1994.
73Exemptions Lists GATS/EL/13, 18,69and91,15April 1994.WT/TPR/S/26
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MERCOSUR level. Reciprocity measures regarding cargo reservation apply inrelation tobilateral
traffic between Chile andParaguay.74
73. Notifications byArgentina, Brazil andElSalvador indicate Paraguay 'sinvolvement inregional
agreements ondiploma recognition75;nosuchnotification hasbeenmade byParaguay.76
74. Although theTreaty ofAscunción, establishing MERCOSUR, envisaged freetrade ingoods
andservices by1995, thecommon market wasestablished ingoods only(with theexceptions discussed
earlier) bythatdate. However, aMERCOSUR framework agreement inservices isexpected tobe
signed inSeptember 1997.
(ii) Banking, finance andinsurance
Banking andfinance
75. Between 1990and1995thecontribution ofbanking andfinance toGDPgrewtoapproximately
5percent.77Since 30June1996, 31commercial banks (ofwhich 16arelocal, 13foreign-owned and
twoState-owned) and56financial firms havebeeninoperation.78TheCentral Bank ofParaguay has
exclusive rightofnoteissue, supervises interest ratesandlegalreserves ofthecommercial banks, and
controls theforeign exchange system.79According toarecent report from theSuperintendency of
Banks, thebanking system ischaracterized byheavy debt,highadministrative costs (e.g., over-staffing,
large bad-debt portfolios), andloweffective ratesofpayments ofcorporate taxes. Thissupports the
allegation thatinterest ratespreads arecaused bylowlevels ofefficiency (Box IV.1, Chart IV.7and
Table IV.3).
74WTO document S/NGMTS/5, 24April 1995.
75These include the1939 Montevideo Agreement (S/C/N/13, 27February 1996); theRegional Convention
ontheRatification ofHigher Education Studies, Qualifications andDiplomas inLatin America andthe
Caribbean (S/C/N/17, 18June1996); the1995 Protocol onEducational Integration, Revalidation ofdiploma,
certificates, titles andRecognition ofstudies ofmedium technical level andthe1995 Protocol onEducational
Integration forUniversity Post-Graduation Studies (S/C/N/18, 27June 1996).
76Notification requirements setinparagraph 4ofArticle VIIoftheGeneral Agreement onTrade inServices
setspecific time limits onthismatter.
77Banco Central delParaguay (1996b), p.55.
78EIU(1996a), p.31. In1995, prior tothebanking crisis there were 35commercial banks, 11ofwhich
hadopened intheprevious sixyears; during thesame period thenumber offinance companies doubled to68.
Thisincreaseisbelievedtoberelatedwith"hotmoney"inflowsassociatedwithmoney-launderingfrominternational
drug-smuggling (EIU (1995), p.40).
79EIU(1995), p.40.Paraguay WT/TPR/S/26
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BoxIV.1 Interest rates andtheir spread inParaguay
Since their liberalization inOctober 1990, both thelevel ofinterest rates andtheir spread have greatly
increased, thusaffecting Paraguay 'scompetitiveness (Chart IV.7 andTable IV.3). Lending andsavings
rates fordomestic currency have risen byabout 43and25.5 percent, respectively, while themaximum
spread hasgrown to21.46 percentage points (July 1996). In1996 average effective lending interest rates
stood atabout 42percentforconsumption loans, while those charged oncommercial credit andindustry
"development" loans stood at31.38 and29.88 percent.
Since theintroduction ofthenewbanking lawinJuly1996, therising trend ofspreads andinterest rates
hasslowed. Theexpansion intherange ofinvestment opportunities (Chapters I,IIandIII), the
classification ofthefinancial institutions onthebasis ofrecognized criteria andtheexclusion of
unreliable firms from thesystem arealsoexpected toassist thereturn tomore competitive conditions in
themoney market.
Source: Banco Central delParaguay.
WT/TPR/S/26
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Table IV.3
Developments inlending rates, 1991-96
(Percentage ratesofannual interest)
YearCommercial loans Development loansPersonal
loans
(national
currency)Credit
cards
(national
currency)Weighted
average
(national
currency)National
currencyForeign
currencyNational
currencyForeign
currency
1991 30.83 14.82 27.49 14.05 39.63 ... 34.45
1992 33.84 14.22 31.80 13.08 39.44 ... 39.47
1993 38.78 12.30 30.51 11.41 44.04 46.13 40.80
1994 35.83 12.16 31.76 11.80 42.11 46.93 41.14
1995 33.64 13.87 31.27 12.97 41.16 49.67 41.15
1996 31.38 14.12 29.88 13.43 41.89 56.99 43.68
... Notavailable.
Note: Development loans correspond tosectoral loans (e.g., agriculture, industry).
Source: Banco Central delParaguay.
76. Intheaftermath ofthe1995 financial crisis (Box IV.2), aseries ofcomprehensive legislative
reforms waslaunched, including thepassage, inJune1996, ofanewCentral Bank Law.80Anaction
planandtimetable werealsodeveloped toeliminate firstandsecond levelintermediation operations
oftheBCP. ThenewBCPlawmaintains theCentral Bank'srôleasatransactions intermediary and
lender ofthelastresort.81TheBCPmayalsofinance public spending foramounts upto10percent
oftheexpected fiscal revenue, except thatspecific legislative authorization isrequired fortheBCP
toprovide guarantees orendorsements forthepublic orprivate sector onacase-by-case basis.82In
May1996, theBCP'sinvolvement incommercial banking activities ceased. By1July1996, alldeposits
bypublic-sector bodies hadbeentransferred tocommercial banks, and,since 24June1996, allsalary
payments topublic-sector employees havebeenmade exclusively through these banks.
77. AnewLawonBanks, Financial andother Lending Entities came intoforce inJuly1996,
containing theprovisions oftheBasel Agreement.83Prior authorization oftheBCPisrequired for
financial institutions tooperate inParaguayan territory; however, foreign investment inthesector
benefits fromnational treatment.84Minimum capital requirements (subject toannual adjustments) are
US$5 million forbanks andUS$2.5 million forfinancial, andsavings andlending institutions.
Participation ofthemother company inafinancial orbanking subsidiary (empresas filiales )inParaguay
maynotbelessthan51percentoftheassets.
80Law 489,29June 1996; Informe delExcelentísimo Señor Presidente Constitucional delaRepública del
Paraguay AlCongreso Nacional ,1July1996, p.p.11 and19.
81Paragraph (e)Article 4ofLaw489.
82Articles 58and59ofLaw489.
83Law 861, 24June 1996.
84Article 7ofLaw861.Paraguay WT/TPR/S/26
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BoxIV.2 The1995 financial crisis
InMay1995, theBCP hadtointervene intheoperations ofseveral financial institutions
including fourcommercial banks, tenfinance houses, twosavings andloanassociations andtwo
private pension schemes which were undergoing aliquidity crisis. According totheBCP, the
highcapital toasset ratio(ofaround 20percent) hadencouraged banks todobusiness offthe
balance sheet. Moreover, alarge partoftheir business was"captive", lending toother
companies under thesame ownership, with poor scrutiny oftheviability ofprojects.
Operational losses threatened thesolvency oftheentire financial system andmade clear the
needforconsiderable changes inthelegalframework governing financial activities.
Ingeneral, BCP'sintervention consisted of:taking overthemanagement ofinstitutions with
problems; providing financial resources forthecontinuation oftheiroperations; isolating these
institutions from therestofthesystem (inthiscontext, operating licences werewithdrawn from
fourbanks, fivefinancial firms andoneinsurance company). Anadditional safety mechanism
wasintroduced bytheBCP, theSafety Banking Network (ReddeSeguridad Bancaria ),to
provide financial resources toinstitutions toforestall possible solvency problems.
Financial assistance tofourbanks (Banco General ,Bancopar ,Bancosur ,andBanco Mercantil )
ledtothelargest monetary expansion inthehistory ofParaguay, equivalent to4percentof
GNP. Despite theopposition oftheBCP andtheIMF, between mid-1995 andMarch 1996,
emergency measures, comprising a15-year loanofuptoUS$100 million, deferred interest
payments andtaxholidays, were effected torescue thefourbanks whose operating licences
were finally withdrawn. ByFebruary 1996, theBCPhadprovided credit ofUS$391 million,
80percent ofwhich hadbeen channelled totheabove-mentioned four banks torepay
depositors andforeign debts. However, further credits were suspended inMarch 1996 because
ofthecostoftheoperation andthelimited prospects forrecovering thefunds.
Inearly 1997, plans were being made torescue fourmore banks using deposit funds from the
State-owned Institute ofSocial Security (IPS). Byearly 1997, these funds, amounting to
G/800billion (US$400 million) resulted intheacquisition byIPSof51percentofCORFAN
and61percentofBanco Desarrollo .
InlateMay1996, despite aPresidential vetoandtheopposition ofboththeIMFandtheBCP,
alaw(Pangrazio law) waspassed toindemnify allaccount-holders (including those with
accounts notformally registered -illegal accounts) withthebanks andfinance companies that
collapsed inthe1995 banking crisis. Payments toformally registered deposit holders cost
some US$50 million while those to"illegal holders" were estimated ataround US$150 million.
Tocounter theinflationary impact ofpayments totheillegal account holders, theBCPissued
treasury billsforapproximately US$132 million (G/265billion), andincreased theminimum
reserve requirement (encaje legal)forfinancial institutions from 17percentto40percent.
78. Since 1991theGovernment hasencouraged companies through fiscal incentives toparticipate
inthelocalstock exchange andcapital market; asfrom 1995, these havebeenextended bycutting
thecorporate taxlevelfrom30percentfornon-quoted companies to10percentforquoted firms.85
Anewlawonstock market operations isunder consideration bytheCongress.
85Law 94,20December 1991; Law210, July1993; Law548, 21April 1995.WT/TPR/S/26
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79. InSeptember1996,torestoreconfidenceinfinancialinstitutions(BoxIV.2),theSuperintendency
ofBanks published areport rating these institutions onthebasis oftheirassets, solvency, reliability
andadministrative efficiency; under thenewbanking law,indicators (called Caula Gandranging from
1to4)werecomputed andpublished foreachentity. Some 17outof31banks and33outof56financial
firms were classified asinstitutions withasound record.
80. Investment instruments available inthebanking sector seemtobelimited toshort-term deposits.
Toincrease thescope ofpossible vehicles, adraftlegalframework fortheintroduction ofnewfinancial
products (e.g., leasing facilities, treasury bonds, andinvestment funds) inthedomestic market was
under consideration bytheCongress inApril 1997. Inaddition, Paraguay 'sdefacto bond market,
resulting fromBCP'sissue oftreasury billstofinance thebailout ofthebanking system (Box IV.2),
istobeformalized withthesubmission toCongress ofadraftlawallowing theTreasury, rather than
theBCP, toissuelonger-term bonds. TheBCPisalsoworking onascheme tointroduce amunicipal
bond market.
81. Since November 1994, theNational Development Bank (BNF) hasrepresented Paraguay in
MERCOSUR 'snetwork ofnational banks (RedBANASUR ),aimed atpromoting intra-regional trade
relations.86
Insurance
82. Anewlawoninsurance waspromulgated inFebruary 1996.87Insurance andre-assurance
services canonlybeobtained fromcompanies authorized tooperate intheParaguayan territory (i.e.,
noinsurance contracts fromabroad areallowed), unless otherwise provided byinternational agreements
concludedbyParaguay.88MinimumcapitalrequirementsforinsurancecompaniesaresetatUS$500,000
while those forre-assurance atUS$2.5 million. ASuperintendency ofInsurance, anautonomous entity
depending ontheBCPmanagement board, wascreated interaliatomonitor insurance companies and
issue regulations whenever required; anadvisory body, theConsultative Council ofInsurance was
established.
(iii) Telecommunications
83. Until recently, Paraguay 'spoortelecommunications services havebeenamajor deterrent to
foreign direct investment. In1995 Paraguay hadthesparsest telephone network inLatin
America (2.7linesper100habitants) andawaiting listof300,000 fornewconnections, more than
twice thenumber ofexisting lines. However, following recent reforms, in1996 telephone density
roseto4.75linesper100habitants andisexpected toreach 6.78in1997and12.51 bytheyear2000.
84. Under anew Telecommunications Law, passed inDecember 199589,aNational
Telecommunications Committee (CONATEL) wascreated asanautonomous entity, within theMinistry
ofPublic Works andCommunications, tocarry outtheregulatory andstandardization functions for
86Banco Nacional deFomento (1996), p.36.
87Law 827,12February 1996; Informe delExcelentísimo Señor Presidente Constitucional delaRepública
delParaguay AlCongreso Nacional ,1July1996, p.12.
88Article 125ofLaw827.
89Law 642, 29December 1995.Paraguay WT/TPR/S/26
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thesector.90ABroadcasting Council wasalsoestablished asanadvisory bodyofCONATEL onissues
related tofrequency distribution andmanagement.
85. The1995 lawcontains provisions governing basic telecommunications, broadcasting (radio,
television), value-adding services (unrestricted competition), private telecommunications services,
concessions,licences,authorizations,standardizationandhomologationofequipment,inter-connections,
userprotection (obligations ofsuppliers), price-fixing andprice-monitoring. AUniversal/General
Services Fund wasestablished toprovide subsidies, when justified, forthedevelopment public
telecommunications services.
86. Inlate1996, aNational Telecommunications PlanandaNational Frequencies Planwereunder
preparation withtheassistance oftheUNDP andtheInternational Telecommunications Union; this
technical assistance istobepartly financed bytheInter-American Development Bank andtheUNDP.
87. Asstated earlier (Chapter III(2)(iv)), thestate-owned National Telecommunications Company,
ANTELCO, isthesoleprovider oflocal, longdistance, international, andtelexservices.91ANTELCO
hasalonghistory ofoverstaffing, lowproductivity andpoorservices, linked toitsold-fashioned or
obsolete technology.92Itsrestructuring inpreparation forprivatization isoneofthemain tasks tobe
undertaken byCONATEL.93InApril 1997 abillforANTELCO 'stransformation intoajoint-stock
company under thenameTelecomunicaciones delParaguay SA(TELEPARSA), wasunder examination
bytheCongress; 10percentoftheshares aretobereserved forANTELCO 'spersonnel.
88. Aninvestment ofUS$550 million appears toberequired tomeetthedemand fortelephone
lines, which isestimated bytheEconomic Cabinet atabout 700,000 lines fortheyear2000. If
ANTELCO weretoundertake thisinvestment without recourse toother sources offinance, itwould
take15years tosatisfy thedemand. Thisisoneofthereasons forashared-risk joint-venture agreement
between ANTELCO andSiemens (Germany), signed inNovember 1995. Siemens wastoreceive
100percentofconnection feesand24percentoftheincome perinstalled lineoveraperiod offive
years.94However, under thisarrangement, ithasbeenestimated thatParaguay 'stelephone service
charges willbeamong themostexpensive inthecontinent, withnewlinesforresidential andcommercial
usetobepriced atUS$800 andUS$1,600, respectively97;theauthorities indicated thatthese prices
arelower thanthose charged previously byANTELCO, andthewaiting period hasbeenreduced for
installation. According totheWorld Bank, theintroduction ofgreater competition withaprivatized
ANTELCO would leadtosubstantial reductions inconsumer tariffs.
89. Atpresent cellular/mobile telephone services areprovided byoneprivate company, Telefonía
Celular SA(TELECEL). Inearly 1997, CONATEL opened bidding fortheintroduction ofasecond
firmtothemarket bytheendoftheyear; theinstallation ofthesystem, representing anestimated
investment ofUS$70 million, istobefinalized by1998.
90Law 642, 29December 1995; EIU(1996c), p.30.
91Since the1995 legislative changes, ANTELCO hasalsoadministered theradioelectrical spectrum andhas
given licences, permits andconcessions tooperate radio ortelevision stations.
92World Bank (1996), p.44.
93Law 642, 29December 1995.
94World Bank (1996), p.44.WT/TPR/S/26
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(iv) Transport
90. Efficient andeconomic transport services arevitaltoParaguay 'sagricultural exports. Road
transport isdominant, accounting formorethan82percentofalltransport services, while theremaining
18percentisequally divided between airandriver transport.95
91. During the1980s, roadtransport replaced rivertransport asthemajor route forforeign trade
(including soybean andcotton exports), although mainhighway access toBrazil islimited because of
saturation usage oftheLaAmistad bridge. Newbridges andinternal andexternal routes arebadly
needed. Paraguay isnotasignatory oftheTIRConvention, butitratified theInternational Land
Transport Convention, asub-regional agreement, in1978.96Thisagreement setsthelegalframework
andreciprocity conditions governing international roadtransport operations among signatories.97
92. Asnoted earlier, highroadtransport costs seem tobeanatural barrier totrade within
MERCOSUR. Cross-border transportation issues arehandled bilaterally between thegovernment
agencies responsible fortheimplementation ofrelevant conventions. AtMERCOSUR level, since
1992, Sub-Group 5onTransportation andInfrastructure hasbeen examining transportation and
transportation-related matters, including safety, standards, transport ofdangerous goods, etc.
93. River transport issubject tonavigational difficulties, irregular services, lackofshipping space
andhighfreight rates.98Portservices areexclusively provided bytheState-owned National Navigation
andPorts Authority (ANNP). Thecountry 'smajor portofcall,Asunción, isreached viaBuenos Aires
andMontevideo which aretransshipping points fordestinations inParaguay.
94. AHidrovía Paraná Tieté project isexpected toregenerate river transport intheRiver Plate
basinbywidening anddeepening channels; 1,500 miles ofrivers andchannels aretobecome navigable,
linking theParaguayan border totheBrazilian Atlantic portofSantos. Apublic tender istobe
announced forthisproject which, when terminated, isexpected toleadtoadropintransport costs
forcotton andsoybean exports.99Improvements arealsoplanned fortheexisting 3,442 km.Paraná
River waterway linking Uruguay (Nueva Palmira) toBrazil (Puerto Cáceres), butitisalsonecessary
toinstall newequipment toallow nocturnal useofnavigable channels.
95. In1996, aState-owned shipping company, theFlota Mercante Paraguaya delEstado
(FLOMERES) wasdivided intofiveseparate firms forprivatization purposes. Asdiscussed earlier
(Chapters IandIII),thisprocess isstillunderway.
96. Until 1992allinbound cargo (cabotage) wasreserved forParaguayan-flag vessels. However,
duetolackofnationalcargocapacity,betweenAugust1992andDecember1994Paraguayprogressively
95Figures contained inBanco Central delParaguay (1996b), p.53.
96TheConvention wasoriginally adopted byLaw699,21July1978 andsuperseded byanewconvention
signed in1990 (Law 10921, 17September 1991). Other signatories areArgentina, Bolivia, Brazil, Chile, Peru
andUruguay.
97Article 7ofLaw699.
98EIU(1995), p.40.
99Europa Publications Limited (1995), p.526.Paraguay WT/TPR/S/26
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eliminatedallcargoreserveandsharingrequirementsvis-à-visArgentina,Bolivia,BrazilandUruguay.100
Forgoods traded withother LAIA countries (Chapter II),when vessel space requirements make it
necessary, cargo sharing ofupto50percentisallowed withships andbarges ofthese nations.101
97. By1996, theState hadfully withdrawn from thesupply ofairline services. In1994 the
Governmentsold80percentofitsholdinginLíneasAéreasParaguayas(LAPSA),and,inAugust1996,
theGovernment authorized thesaleofLAPSA (including theremaining 20percentofitsownshares),
nowcalled Transportes Aéreos delMERCOSUR (TAM), totheBrazilian companies Trans América
Línea Aérea SAandTransporte Aéreo Marilia -Transportes Aéreos Regionais SA.
(v) Tourism
98. In1995Paraguay 'searnings fromtourism reached US$247.7 million, more thanreceipts from
exports ofsoybeans, oneofthemain cashcrops. Visitors mainly come from Argentina andBrazil
for"shopping tourism"; theaverage length ofstaywas3.5daysin1991.102Thistypeoftourism
is,interalia,stimulated byfiscal concessions under thetourism régime (Chapter (III)(4)(ii)), while
investment projects benefit from fiscal incentives (Chapters IIandIII).
100Transitional provisions ofArticle 11ofLaw269, 13December 1993.
101Decree-Law 43,24March 1971; Law295,24November 1971; Decree 27371, 19August 1981; and
Dun&Bradstreet (1996), p.2/1115.
102EIU(1995), p.39.WT/TPR/S/26
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