Report No. 299a-PA FilE 1912/14Economic Memorandumon Paraguay - '* & C. FILESMay 10, 1974

Latin America and the Caribbean Region

Not for Public Use

Document of [nternational Bank for Reconstruction and DevelopmentInternational Development Association

This report was prepared for official use only by the Bank Group. it may not be publishor.quoted or cited without Bank Group authorization. The Bank Group does not accept respon-sibility for the accuracy or completeness of the report.

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CURRENCY EQUIVALENTS

Currency Unit = Guarar1t

Exchange Rate Effective Since 1960

Official Rate - US$1.oo -= 126

Tnis economic memorand= is based on the :findingsof a mission to Paraguay from September 6 to 21,1973, composed of Josefina Vial (Chief of the mis-sion), Jorge Hay (General Economist) and RolandoArrivillaga (Loan Officer), and of an updatingv)isit by Mr. Hay in Febxuary, 1974.

ECONOMIC MEMORANDUM ON PARAGUAY

Table of Contents

Page No.

BASIC DATA

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

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

Population and Employment .............................Income Distribution ....................... *..... 1Growth in Overall Output .............................. 2Agriculture ............................. . 6Agricultural Production .............................. 7Livestock Policy .............................. . 9Colonization . . ........................................10Agricultural Credit .................................. 11Public Finances ....................................... 12

Central Government Finances ...... ................ 12Consolidated Public Sector ....... ................ 15

Development Finance Institutions ...... ................ 17Prices and Wages ...................................... 18M-Tonetary Situation .................................... 21Balance of Payments ................................... 23

II. MEDIUM-TERM ECONOMIC OUTLOOK ........ .................. 26

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

Page I of 2 pages

COUNTRY DATA - PARAGUAY

AREA 2 POPUlATIoN DENSITY406,752 kz 2.4 million (mid-1972) 6 per km2

Rate of Growth: 2.6 (ftom 1960 to 1970) *- per km2 of arable land

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

INCOME DISTRIBUTION (1970) DISTRIBUTION OF LAND OWNERSHIP7 of national income, higrast quintile 30 7. owned by top 10% of owners

lowest quintile *. 7. owned by smallest 107 of owners

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

- rural .. - rural

NVTRITION (1970) EDUCATION (1970)Calorie intake as % of requirements 102 Adult literacy rate 7 79Per capita protein intake 65 Primary school enrollment 7. 93

1/GNP PER CAPITA in 1972 US $ 315

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

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

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

OUTPUT, LABOR FORCE AYDPRODUCTIVITY IN 1970

2/Value Added Labor Force- V. A. Per Worker

1S$Mln. % mb. % 'I. 7

Agriculture 192.2 32.1 0.385 56.7 486.6 56.6Industry 146.9 24.5 0.148 21.2 992.6 115.6Services 259.6 43.4 0.154 22.1 1,685.7 196.2Unallocated

Total/Average 59877 100.0 0.697 100.0 859.0 100.0

GOVERNMENT FINANCEPublic Sector Central Governmcnt

( ,.Mln.) , of GDP ¢ MIn.) of GDP1973 1972 1973 1973 972 1973

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

1 The Per Capita GNP estimate :s at 1972 market prices, calculated by the same conversiontechnique as the 1972 World Atlas. All other conversions to dollars in this table areat the average exchange rate prevailing during the period covered.

2/ Total labor force; unemployed are allocated to sector of their normal occupation. "Unallocated" consistsmainly of unemployed workers seeking their first job.

not availablenot applicable

* negligible

Page 2 of 2 pages

COUNTRY DATA - PARAGUAY

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

MLrney and Quasi Money 9,826 10,981 12,826 14,632 18,090 21.6293en)C Credit to Public Sector 4,094 4,611 4,514 4,612 5,718 5,635 IABenk Credit to Private Sector 10,193 12,673 14,465 16,038 17,822 10,726 L

(Percentages or Index Numbers)

Mrney and Quasi Money as % of GDPGeneral Price Index (1964 * 100) /b 109.0 111.5 110.5 116.0 126.7 143.0Annual percentage changes in:

General Price Index 0.6 2.3 -0.9 5.0 9.2 12.9Bank credit to Public Sector 12.6 -2.1 2.2 24.0Bank credit to Private Sector 24.3 14.1 10.9 11.1

BALANCE OF PAYMENTS MERCHANDISE EXPORTS (1973)

1967-9 1972 1973 US Mln 7.(Millions US $)

Beef 40.4 31.8

Exporta af Goods, NFS 66.2 106.2 151.7 Industrial seeds 12.2 9.6Imports of Goods, NFS 95.5 99.4 151.8 Lumber 11.8 9.3

Resource Gap (deficit - -) -29.3 6.8 -0.1 Cotton 11.6 9.1Cakes and expellers 7.6 6.0

Interest Payments (net) -4.5 -9.6 -11.1 All other commodities 43.3 34.2Workers' Remittances - - - Total 126.9 100.0Other Factor Payments (net) -1.1 -1.5 -1.4Net Transfers 2.5 2.3 2.5 EXTER21AL DEBT, DECEMBER 31. 1973Balance on Current Account -32.4 -2.0 -10.1

Direct Foreign Investment 3.5 2.9 5.4 US $ MlnNet MLT Borrowing Public Debt, incl. guaranteed 126.6

Disbursements 26.7 24.8 30.9 Non-Guaranteed Private DebtAmortization () -4.6 -7.1 -10.8 Total outstanding & DisbursedSubtotal 22 .1 T7-7 20 1

Capital Grants 2.6 2.7 3.0 DEBT SERVICE RATIO for 1973-Other Capital (net) 3.6 -10.9 4.0 X

Other items n -iIrcrease in Reserves (+) -0.6 10.4 22.4 Public Debt incl. guaranteed 14.4

Non-Guaranteed Private DebtGross Reserves (end year) . . Total outstanding & DisbursedNet Reserves (end year) 20 2 30.6 53.0

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

Through - 1971 IBRD IDAJS $ 1.00 - ¢126__

1.00 - US $0.008 Outstanding & Disbursed 13.4 25.5

Undisbursed 3.2 5.1Since - 1971 Outstanding incl. Undisbursed 16.6 30.6US $ 1.00 ¢126

1.00 = us $0.008

1/ Ratio of Debt Service to Exports of Goods and Non-Factor Services.

la June 1973;b Year everage

not available

not applicable

SUSMARY AND CONCLUSIONS

1. The Paraguayan economy experienced an acceleration in economicgrowth during 1969-72. During this period, overall output increased at anaverage rate of 5.3% per annum as compared with a 4.37% yearly growth for thedecade ending in 1972. Preliminary estimates indicate that GDP grow by afurther 5.8% in 1973. In recent years the economy responced quickly to thestimulus provided by rising world demand for ̀ ts export products. The supplyresponse was facilitated by earlier investments in transportation, officialassistance to mechanize agriculture, a-..d the reinforcement of fiscal andcredit export incentives. Export earnr,ngs boomed between 1969 and 1973,easing the foreign exchange constraint to growth and helping to boost domes ,icsavings and investment. Although income per head continues to be relativelylow (about US$315 in 1972) and its discrioution could stand improverment, thecondition of the rural poor appears to have benefitted in recent years fromthe dynamic nature of the agricultural and livestock sector.

2. While the strengthening of external demand .-or Paraguayan productsgave considerable impetus to output growth in the 1970s, increased exportprices and world inflationary conditions broke Paraguay's impressIve recordof price stability. The consuner price index, which in the second half oftne 1960s increased at an average annual rate of 1.3%, rose by 5% in 1971,9% in 1972 and 13% in 1973. Wholesale prices, however, increased faster lastyear (33%) largely reflecting price rises in internationally tradeable commodi-ties. by mid-1973 a serious inflationary threat appeared imminent. however,a slowing down of foreign exchange reserves accumulation in the second halfof the year, accompanied by determined Government efforts to curb inflationt'arough fiscal and monetary measures, managed to avert a runaway inflation.

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

4. Since efforts to curb inflation through control o donmes--c ;):'c

of beef were unsuccessful, the authorities resorted to strict curr:-uwaz pea-ture policies, increased fiscal effort to mop up excess liquidity, and re-strictive credit policies. At the same time, disincentives to im,,orts otfluxury consumer goods were maintained while a liberal policy of duty exemrt:-o'rzon imports of capital goods and transport equipment was applied. Goverr-sxmntincomes policy depressed real wages in urban areas (particularly taose of

public servants), but reai wages in the countryside increased rapidly underthe influence of rising export prices and labor shortages at harvesting time.T,he improvement in tne Central Government financial situation in 1973 and theelimaination of the overall fiscal deficit made a major contribution to coolingoff the economy.

5. During the period of 1969-72, thxe Central Government faced theproblem or having to check increasing budgetary deficits in the face ofdeclin-.n colleczions from -ts largest single source of revenue--customsduties on imports. Collections from import duties, which in 1969 representec44/% of total tax receipts, dropped to only one-third in 1972. The reductionin thie share of import taxes was due to sluggish imports, legal reduction inimport duties to discourage smuggling and deterioration in the operations ofthe Customs Administration. In January 1972 at the CIAP Country Review, theGovernment stated that it would intensify domestic resource mobilization andagreed to establish revenue targets for 1972 and 1973. The authorities em-barked on a number of administrative and tax reforms which, while failing toi-prove performance in 1972, paved the way to a marked recovery the followingyear. Current revenues of the Central Government in 1973 increased by 20%,ma:-dly from increased collections of import duties which resulted from anupsurge in imports, increases in some tax rates, and improved tax administra-tion. Current expenditures, however, rose by only 7% despite the higher costof goods. As a result, savings on current account increased from ¢ 842million (or 0.9% of GDP) in 1972 to 0 2,205 million (1.8% of GDP) in 1973. Inthe public sector as a whole, public savings rose from 2.2% of GDP to 2.8%.

O. Paraguay's balance of payments experienced a notable change in the1970s. The combined influences of greater export volumes and improved termsof trade permitted substantial increases in import capacity, the rate ofeconomic growth, and the level of foreign exchange reserves. The resourcegap, which averaged US$29.3 million in 1967-69, turned into a US$6.8 millionsurplus in 1972. Export performance in 1973 continued its impressive recordof recent years under the impetus of rising world commodity prices, particu-Larly for beef, totacco, industrial seeds, coffee, essential oils andsoybeans. Crop production was boosted in 1973 by good weather conditions.As a result, export receipts increased by 47% over the previous year to atotal of some US$127.0 million--more than two-and-a-half times the 1966-69average annual level. The net foreign exchange reserves which had alreadyincreased during 1971 and 1972, increased by US$22 million in 1973 and reachedUS$53 million by year-end. The buildup of reserves was primarily made-ossible by an increase in net capital inflow and in spite of a faster growthof imports than of exports.

7. Given the importance of livestock in the economy, the policy theGovernment pursues with respect to livestock marketing in 1974 and 1975 will?lay a decisive role. As previously mentioned, to restrain inflation theaovernment embarked upor. a policy of controlling domestic beef prices andlimiting exports. This policy created market distortions as producerswithheld cattle from the market and increased illegal exports to Brazil.

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As a result, in February 1974 the Government eliminated some of the controls,introduced a beef export tax of ¢ 2,000 per head of cattle to help regulateranch-gate prices, and set a 220,000 head ceiling on 1974 beef exports.IWhile these steps have been in the right direction, the Government shouldconsider the removal of remaining controls and, instead, introduce a systemby which the allocation of beef for internal and external consumption wouldbe determined by flexible export taxes. This would alleviate inflationarypressures and give the authorities some control over the movement in realwages. The price at the ranch-gate wilL neted to reconcile two opposingobjectives: be low enough to discourage fu:<ther reduction in domestic con-sumption and high enough to act as an inceni:ive to the producers and constraincattle smuggling to Brazil. Should the ranchers' rate of return drop belowa reasonable pre-determined level, the beef export tax would have to belowered. Tihe tax should be removed altogether as soon as external demandconditions allow reasonable domestic beef prices to emerge from the interplayof market forces or as soon as the Government is ready to introduce a moreequitable and economically efficient system of taxation.

8. The tasks of economic management in 1974 are likely to be compli-cated by the increase in world oil prices. While retail prices for petroleumproducts showed some increase in 1973, by far the greatest increase tookplace in February 1974 when average retail prices were doubled. This riseis estimated to have resulted in a first round increase of about 3% in theconsumaer price index, but its impact over the year is likely to be somewhatgreater. This increase and the projected price increases for wheat, meatand other staples, combined with the recent wage increase, may be expectedto generate in 1974 an inflationary pressure equal to or somewhat in excessof last year's. Nevertheless, prospects for a continuation of rapid economicgrowth this year are favorable, provided an increase in investment with majoremphiasis on the commodity-producing sectors takes place. In order for thisto rmaterialize, the Government will have to pursue sound economic policies,reasonable fiscal restraint and continue its efforts to hold down inflationto manageable proportions. The growth propellants are likely to be thelivestock sector, overall favorable export demand for the country's agricul-tural and forestry products, and the expanded domestic demand from theinitiation of the construction of the Itaipu hydropower complex which willbe exporting energy to Brazil.

9. Paraguay's development prospects over the medium-term appear to bepronmising. The Government's strategy of inducing growth in the agricultural,livestock and forestry sectors should be conducive to both an acceieration, oLoverall growth and to a relative improvement of the income position of therural population. The potential for further agricultural growth li-s in anumber of favorable factors, such as the existence of vast extentions ofunutilized land, great hydroelectric development potential, which may be usedfor processing agricultural and forestry products, and ample world markets forParaguayan products. If private investment is encouraged, the potential forexpansion oZ^ export earnings is considerable.

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

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prepare, and execute a steady pipeline of development projects orientedtowards the direct support of the commodity-producing sectots, and (b) theimplementation of a comprehensive reform of the tax system which would lessenits dependence on import duties, make it more responsive to the growth ofthe economy, and assure a further increase in the rate of public savings.In particular, if the country is to take full advantage of the developmentopportunities offered by the construction of the Itaipu, Yacireta-Apipe andCorpus hydroelectric plants, a rapid reinforcement of project planning andexecution capacity is essential.

11. To achieve the desired growth objectives, imports of goods andservices would need to increase from almost US$200 million in 1974 to someUS$350-400 million in 1979. Provided the economic environment remains favor-able, Paraguay has the potential to increase its exports of goods and non-factor services from about US$190 million in 1974 to about US$325 million in1979. Thus, a large proportion of the import bill may be expected to befinanced out of increased export earnings. However, an increasing currentaccount deficit would emerge. This deficit has been projected to rise fromUS$20 million in 1974 to almost US$60 million in 1979.

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

13. In filling the capital requirements of the public sector at theprojected economic growth rates, external lenders should consider the overallfinancing scenario of the public sector. If in such circumstances externallenders limited their financing to the foreign exchange component of theprojectizable portion of public investment, a short-fall of about US$15million with respect to the country's foreign exchange needs may result. Tofill the remaining gap it would be necessary for external lenders to cover,in addition to the foreign exchange component, 20% to 25% on the average ofproject costs in the form of local currency financing.

14. Paraguay's outstanding and disbursed external public debt, repayablein foreign currency, is projected to increase from about US$127 million in1973 to about US$300 million in 1979. Despite this increase, the country's

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debt servicing capacity is expected to improve. The debt-service ratio isprojected to decline from about 14.4% in 1973 to somewhat below 10% in 1979,wnile the capacity to import is expected to increase at a satisfactory rate(5.5% per year). This result follows from the projected increase in thecountry's exports, a trend which already ensued in recent years. Given theseexpectations and provided sound economic management continues, Paraguay shouldremain creditworthy for considerable long-term borrowing on conventional terms.Nevertheless, intensive efforts should be made by the Government to restrictshort- and medium-term borrowing as much as possible. At the same time,because of poverty and appropriate overall economic policies, the countryshould also remain eligible for assistance on concessionary terms for a part ofits capital requirements.

I. RECENT TRENDS

Population and Employment

1. The population of Paraguay is estimated to have reached a totalof about 2.4 million in 1972 of which 1.5 million or nearly two-thirds wasrural. On the basis of preliminary 1972 population census results, thegrowth rate during the decade of 1962-72 was 2.6% annually. This is con-siderably below the previously assumed growth rate of 3.1%. A major factorresponsible for the lower growth rate was an underestimation of the consider-able emigration to Argentina. Moreover, the widespread belief that thecountry was undergoing a process of ruralization was dispelled by the censusresults. Population growth in localities with 5,000 people and over, whichmay be classified as urban, proceeded at the rate of 3.3% per annum, whilethe rest of the population grew at a rate of 2.4%. Nevertheless, this processof urbanization does not appear to have generated serious pressures on urbancenters as in the case of many other developing countries.

2. Paraguay's state of economic development is such that except forrelatively small numbers no truly industrial labor force has emerged. In-dustrial workers over a large expanse continue to retain their rural rootsand thus combine a mixed pattern of industrial-agricultural employment.This dual form of occupation is largely responsible for the absence of anyserious urban unemployment problem, although in some instances it has ac-centuated the rural underemployment problem. Furthermore, many urban un-employed have migrated to adjacent Argentina where jobs are frequently moreattractive in terms of income than employment in Paraguay. Lastly, continuedavailability of virgin land as well as the growing job opportunities inrural areas in recent years generated by double-cropping and the boom inagricultural exports have served as escape valves from potential urDanunemployment.

Income Distribution

3. A sample survey of household incomes for 1970 was carried out inParaguay by the Instituto de Desarrollo Integral y Armonico (IDIA). Thesurvey showed that the bulk of the families was concentrated in the lowestincome levels, the situation being particularly critical in the rural areas.This skewness is easily explainable in an economy where the population ismainly rural and where well over four-fifths of the farmers may be charac-terized as small farmers, a high proportion of whom are in the subsistencecategory. The combined results of the 1972 census and the above samplesurvey of households, give the following comparison of income distributionin Paraguay and selected Latin American countries:

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Table 1: PERCENTAGE SHARE IN TOTAL INCOMEGOING TO HOUSEHOLDS BY INCOME LEVEL

Country Lowest Middle Highest Top20% 60% 20% 5%

Paraguay 3.6 34.8 61.6 30.1

Brazil 3.1 34.8 62.1 32.6

Honduras 3.2 29.3 67.5 36.0

P,exico 4.0 32.0 64.0 36.0

Source: Size Distribution of Income, IBRD, August 1973 for Brazil (Langoni,1970), Honduras (ECLA, 1967-68) and Mexico (Navarrete, 1969). ForParaguay the data are based on the IDIA survey and 1972 populationcensus.

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

4. The estimated per capita GNP for the total population in 1970 wasUS$260, with US$133 for the rural area and US$476 for the urban area. Since1970 agriculture in Paraguay has made considerable gains in terms of relativeprices in the economy, thus the income differences between urban and ruralpopulation have probably narrowed. It is estimated that the per capita GNPof 13% of the population in 1970 was below US$50, and 31% of the populationwas below US$75. GNP per capita for 1972 is estimated at US$315. This re-presents an increase of roughly 5% in per capita product in real terms.Since most of this increase accrued to agriculture the per capita GNP ofthe lowest third of the population probably increased somewhat faster.

Growth in Overall Output

5. GDP in Paraguay has continued to grow steadily at a relativelymoderate rate of 4.6% per annum during 1962-72. However, a markedacceleration of growth has taken place in recent years with the annualrate attaining 5.3% on the average for the period 1969-72. During thislatter period, the rates of growth of the agriculture, livestock, andforestry sectors have been noticeably higher than the average for thedecade, and electricity and water have almost doubled their contributionto GDP. The increasing external demand for agricultural, livestock, andforestry products has been the main determinant in the relatively higherexpansion of these sectors. The initiation of operations of the Acaray

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hvdroelectric plant and the urbanization works of CORPOSANA (both with IDBfinancing) have provided the main impetus to the other sectors.

Table 2: GROSS DOMESTIC PRODUCr 1962-72

(Annual Percentage Rates of Growth)

1962-72 1970 1971 1972 1969-72

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

GDP 4.6 6.1 4.6 5.3 5.3

Source: Table 3

6. GDP in 1973 is estimated to have registered a 5.8% growth rate,however, GDY 1/ grew by 9.2%. During 1972, the livestock sector increased itsproductive capacity by building up herds; in 1973 tne impact is already beingfelt. This was mainly the result of Government's livestock development pro-grams supported by IDA/IBRD. Among industrial products, the most dynamicduring this year appear to have been textiles and lumber. Commerce andfinance, the most important components of the services sector are estimatedto have expanded at about 6%. Electricity growth is estimated at almost12%--the first exports to Argentina have started recently.

7. During the period 1967-69, the annual rate of investment has averagedapproximately 17% of GDP. The investmenlt rate has tended to increase andreached a maximum of 19.3% of GDP in 1973. Because of the slower growth inprices for capital goods than for consumption goods, growth of investment inreal terms has been even higher. A significant part of capital goods isimported and import prices have lagged behind export prices of Paraguayangoods.

8. According to recorded data, the share of private cone.u ).ion in . Pincreased slowly during 1965-70 but declined drastical1y in 1972-7a. 2/Private consumption excludes smuggled imports of consumption goods arl. there-fore understates the level of private consumption. ?breover, since she vom.t=.of smuggling varies from year to year, the drop in private consuaption in1972-73 may well have been more apparent than real. Even if higher consump-tion prevailed in 1972-73, the marked increase in the savings race would seemto indicate a clear upward movement in the rate of private savings duringthe period. The increase in private savings reflects largely the expansiortof livestock inventories in the hands of the ranchers.

1/ GDY is defined as GDP plus terms of trade effect on income.

2/ Private consumption and savings are obtained as residuals.

Table 3: GROSS DOMESTIC PRODUCT BY SECTOR OF ORIGIN, 1965-72 AND ESTIMATE, 1973

(At Market Prices in Millions of Guaranies)

Current Prices Constant 1972 PriceaAverage Average

1965 1967-69 1970 1972 1965 1967-69 1970 1972 19731'/

Goo8ds Sec.or 34 085 38 681 51 833 40 119 43,125 47,064 518339891.\gt 20,517 2, 73,395 2,451 22 30,222 33,395 35,198

of whic.- ilvestock (6,445) (6,775) (7,283) (12,380) (10,845) (11,055) (11,476) (12,380) (13,061)forestry (2,239) (2,542) (3,331) (3,926) (3,423) (3,200) (3,683) (3,926) (4,103)

Manufacturing & Mining 8,770 10,769 12,581 15,905 11,214 12,939 14,676 15,905 17,018Construction 1,358 1,839 2,076 2,533 1,454 1,900 2,166 2,533 2,675

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

ross Dostic Product 892 65,798 74921 96,894 70,252 79,360 87,984 9 _*_394 102,519

11 Estimdte

Source e 1Rank of Paraguay

Table 4: EXPENDITURE ON GDP, 1965-73

(In Millions of 1972 Guaranies)

Average1965 1967-69 1970 1972 1973

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

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

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

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

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

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

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

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

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

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

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

Agriculture

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

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

12. Area under cultivation in Eastern Paraguay could be expanded ten-fold; however, this would require investing in farm machinery, drainage, andto a lesser extent, irrigation. At present, a major part of the area isbeing used for extensive cattle raising with the remainder being eitherminifundia (over 80% of the farms are below 21 hectares) or forests. Arecently completed UNDP/FAO survey identified 3.7 million hectares of forestland as commercially valuable timber. However, the forests are not beingrationally exploited. If the situation is not corrected it may result indepletion of a major tnatural resource in the country.

13. The Chaco with over 24 million hectares of land (60% of the landand only 2.3% of the farms) has a totally different land tenure structurefrom that of the Eastern Region. In this western part of the country over60% of the farms exceed 100 hectares, being dedicated mainly to extensivecattle raising (40% of the herd is in this region). In 1967-70 the herdin this area was adversely affected by prolonged drought conditions. Withfavorable weather conditions since, the herd appears to have recovered. Live-stock and, in some areas, crop production could expand considerably in thisregion provided relatively heavy investments in land clearing, irrigation,and drainage are carried out. Extensive livestock ranching, however, will betne main land use in most of the Chaco for many years to come since muchland has little or no alternative use possibilities.

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Table 5: DISTRIBUTION OF FARMS BY SIZE, 1970

(Number of Farms,

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

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

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

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

% Distribution 7.3 54.3 24.7 9.5 4.2 100.0

Source: 1970 Agricultural Census.

Agricultural Production

14. As indicated (para. 5), the expansion of the agricultural and live-stock sector accelerated significantly in recent years. While in 1962-72 thesector's output grew at an average annual rate of 2.9%, in 1969-72 it in-creased at 4.3% per annum. However, when analyzed on a product by productbasis, this expansion appears to have been fairly uneven. Table 6 includesa group of selected products which accounted for about two-thirds of grossvalue of agricultural and livestock production in 1967-69 and shows a broadrange of growth rates for the various products. The fastest growing productsappear to have been soybeans, rice, and wheat. In the case of soybeans andwheat, the growth has been the result of the grain program supported by AID.Although the program has been a failure in terms of financial results, itmanaged to increase production significantly by expanding the area undercultivation of these crops, although yields have declined. Total area underwheat will probably decline in the foreseeable future, but by elimination ofland where productivity has proven to be marginal, yields should increaseconsiderably and total production may be only slightly reduced from the1970-71 level. The wheat harvest of 1972 was a total failure due to badweather conditions. Production of soybeans increased rapidly in the lastthree years in response to higher world prices and is further expected toincrease very rapidly in 1974. With respect to rice, the decline in pricespaid to producers has not been large enough to discourage production growth,which again in this case is the result of expansion of the area ?l^xe.Although rice is almost exclusively consumed domestically, neighboring coun-tries could supply export markets for this product. In the first quarter of1973 (latest available information) the price of rice had considerably re-covered from its 1972 level, as had the prices for all products inclt,ded inTable 6 (even if seasonality is taken into account). Sugarcane plantationsalmost doubled between 1969 and 1971, thus the increase in production. Beinga permanent crop, sugar does not adjust easily to short term price changes.

Table 6s PRODUCTION AND RATES 0F GROWTH FCR SEIECTED PRODUCTS, 1968 and 1972

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

1968 /1 1968 /1 1972 /1 Productiop Producers Prices /4

Wheat 1.1 22.1 30.8 8.7 2.9Rice 1.0 23.2 42.0 16.o -2.6Maize 5.4 229.0 226.6 -0.5 -1.3Cassava 16.4 1,585.5 1,734.8 2.3 4.4Beans 1.5 29.6 28.8 -0.5 2.2Potatoes, sweet 1.9 122.3 149.1 5.1 2.7Bananas 3.1 223.5 250.9 2.9 0.6 mTobacco 2.6 19-8 18.8 -1.3 -1.4Cotton 2.1 32.5 35.7 2.4 4.0Soybeans 0.7 17.8 104.7 56.o 0.9Peanuts 1.1 18.3 20.2 2.5 0.0Sugarcane 3.4 959.5 1A48.3 6.8 -2.4Coffee 1.3 5.5 4.5 -2.0 0.8Beef /2 19.4 656.o 695.0 1.9 0.5M4ilk 7§ 4.9 88.o 86.0 -O.r -4.6

/1 Three year average: 1967-69 1968, and 1971-73 = 1972.7T Data for 1967-69 and 1970-72, in thousands of heads slaughtered.73 Data for 1967-69 and 1970-72.70 Lagged one year. Base period 1966-68, end period 1970-72.

Source: USDA, MPG, Central Ban<.

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

Livestock Policy

15. Livestock policy is a key issue for the Paraguayan economy sinceit affects the balance of payments, consumer prices, and overall social andeconomic development. In the case of the balance of payments, an increase inexport proceeds derived from meat and livestock by-products accounted for70% of the 1972 trade surplus. This surplus of over US$16.0 million was adeparture from the deficitary condition which prevailed since 1966. However,the rising prices of livestock products in world markets have presented theParaguayan authorities with a mixed blessing. On the one hand, the rapidrise in world beef prices contributed to strengthen zhe balance of payments;on the other hand, since beef accounts for 15% of the consumer price index,the escalating world meat prices have had serious repercussions on the domesticprice level and have been responsible for most of the inflation in the pasttwo years.

16. As part of its overall strategy to restrain inflation, the Govern-ment embarked upon a policy of controlling domestic beef prices. To thiseffect, the Government took a series of successive measures which by andlarge proved to be ineffective in stopping domestic price rises. First, abeef export quota of 220,000 head (25% smaller than the 1972 exports) wasinstituted for 1973. Domestic price rises continued, however, even afterthe quota was met in the first months of the year, as a result of cattleretention in anticipation of the 1974 export season as well as from thedecline in the availability of inferior cuts and offal sold in the domesticnarket as a side-product of beef exports. In the second half of 1973 theGovernment attempted to arrest the increase in beef prices by introducingbeef price controls. Ceiling prices were set for the principal cuts ana,in order to force ranchers to deliver beef for the domestic market, theGovernment passed a decree tying the 1974 export quota to deliveries fordomestic consumption during the remaining months of the year.

17. The measures failed to achieve the desired objectives and resultedinstead in bringing about the birth of a black market for beef. The rancherswere apparently unimpressed with Government threats to tie exports to domesticdeliveries. Furthermore, in its zeal to arrest inflation, the Government setthe beef price ceilings at a level barely above the December, 1971. market pricesand some 20% below average beef prices in the second quarter of 1973. In tneface of rising export prices, the incentive to retain beef for the 1974 exportseason was therefore considerably increased.

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18. In February 1974, the Government eliminated some of the controlson beef, introduced a beef export tax of 0 1,000 per head of cattle to helpregulate ranch-gate prices, and set a 220,000 head ceiling on 1974 beefexports. While these steps have been in the right direction, the Governmentshould consider the removal of the remaining controls and, instead, introducea system by which the allocation of beef for internal and external consumptionwould be solely determined by flexible export taxes.

CoLonizat ion

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

20. The IBR has failed to grant property titles (35% of the land lackslegal ownership) to the settlers and many of the original settlers haveabandoned or transferred the land. This situation has a double negativeeffect; first, it is not conducive to efficient use of the land; second, itprevents the collection of property taxes. Moreover, the IBR has not beenable to provide the necessary infrastructure in colonization areas, or tech-nical and financial assistance at adequate levels.

21. Colonization schemes would need to settle six to seven thousandfamilies per year in order to provide employment opportunities for newentrants into the rural labor force and halt emigration. More familieswould need to be settled if the existing minifundia problem is to be alle-viated. The IBR spends about US$500 to settle a family, but a minimum ofUS$2,000 would be required to provide each family of settlers with theon-farm investments and infrastructural services needed to give them achance of success. This appears to be totally beyond the IBR's resources.It appears that, to be effective, the colonization program should be re-organized and converted into a joint venture of four institutions: theIBR which would participate as a coordinator, the Ministry of Agricultureand Livestock which would grant technical assistance, the Ministry of PublicWorks which would be responsible for infrastructure, and the BNF which wouldsupply credit facilities. Basically the program should be oriented to:(a) opening state-owned land for new settlers, (b) consolidating existingsettlements, and (c) resolving the problem of non-viable minifundia.

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

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23. A simultaneous promotion of agricultural and livestock productionof medium and large farms is required in order to expand the taxing capacityof the sector and thus generate resources to finance the colonization pro-gram particularly in its first stages. It should be noted that the ampleavailability of unused public and private land in Paraguay permits the dis-tribution of bigger units than in other countries' colonization schemes. Asolid source of financial resources is needed, however, since to sustaina meaningful colonization program the Government would need to acquire un-used private lands.

Agric4ltural Credit

24. Agricultural credit is confronted with a difficult situation inParaguay. The core of the problem lies in the precarious capitalizationproblems of the financial institutions supplying long and medium term creditto the sector. The Banco Nacional de Fomento, the main source of agriculturalcredit, faces serious financial and capitalization problems (paragraph 37).Its difficulties are due mainly to 170 large loans in default made under theNational Grain Program. Its weak financial position has impaired its abilityto meet the rapidly growing needs of the sector.

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

26. The only solid credit institution operating in the sector inParaguay is the Livestock Fund, which started in 1963 as the project unitto administer an IDA credit of US$3.6 million (Credit 47-PA). SubsequentlyIDA and IBRD financing amounting to US$16.1 million have strengthened itsoperations. The institution is now an independent agency of the CentralBank administered by a coordinating committee composed of a president ap-pointed by the Central Bank, one representative of the Banco Nacionale deFomento (BNF) and a technical director. The management of the Fund has beensound and this has reflected itself in high loan recovery and the strongfinancial position of the institution. The funds from the Third Livestockproject are almost fully committed, and there appears to be ample justifica-tion for replenishment of the Fund's resources.

27. Commercial bank financing of the agricultural sector is directedalmost exclusively to larger market-oriented farmers. A high proportionof commercial bank loans to agriculture is short-term and geared to market-ing operations. High interest rates in the past have been a major consrtrainrfor commercial banks' expansion of lending operations. About three yearsago, when the rate of inflation was low, interest rates charged by thesebanks fluctuated between 11% and 36%, while those charged by the BNF fluc-tuated between 10% and 18%. With accelerating inflatiorn in the last twoyears, commercial bank rates have declined in real terms.

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28. Two main conclusions can be drawn from the situation describedabove. Firstly, there is an urgent need to strengthen the financial andmanagerial position of the institutions granting medium and long term creditto agriculture so that they can safely expand their lending operations.Secondly, and connected with the preceding conclusion, the need for a revisionof interest rates of credit institutions is called for. As long as inflationpersists a mechanism which ensures positive interest rates in real termsshould be devised, thus protecting the financial institutions from furtherthreats of decapitalization.

PUBLIC FINANCES

Central Government Finances

29. In the period 1969-72 the Central Government faced the problem ofhaving to check increasing overall budgetary deficits in the face of declin-ing collection from its largest single source of revenue - taxes on imports.Revenues from import duties, which in 1969 accounted for 44% of Governmenttax revenues, accounted for only one-third in 1972. The reduction in theshare of import taxes has been the result of sluggish imports, legal reductionin import duties to discourage smuggling, and deterioration in the operationof the Customs Administration.

Table 7: ANNUAL VARIATIONS IN GOVERNMENT REVENUES AND EXPENDITURES

(Nominal Growth Rates-Percentages)

1969 1970 1971 1972

Government Current Revenues 19.5 1.4 1.3 6.4

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

Government Current Expenditures 6.9 -3.1 3.5 12.2

Gross Domestic Product 7.5 6.9 11.8 15.7

Source: Table S.

30. The authorities sought to reduce overall budgetary deficits throughrestraint of current and capital spending and through efforts to increaserevenues. They succeeded in their endeavor to keep the growth of currentexpenditures below GDP growth rates in current prices during 1969-72. Thetask of increasing revenues was much more difficult, however, given theinelasticity of revenues from internal taxes to nominal incomes and theacceleration of price increases. While through the introduction of newrevenue measures, changes in tax rates, and administrative improvements,

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Table 8: CGNTRAL GOVMNWT FINANCES 1969-73

(In Millions of Current ,)

Actuals Es imates1969 1970 1971 1972 1973

Current Revenues 8,676 8,797 8,909 9,478 11,423of which Import Taxes (3,787) (3,382) (3,279) (2,885) (3,603)

Current Expenditures 6,961 7,423 7,686 8,636 9,218

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

C'apital Revenies - -- 9 - -

Capital Expenditures 1348 1S53 1,661 164 1Direct Investment L ,2936 ,00 1650 931Cap. Trans. to Public Sector 5.99 564 4~68 5 597a. to non-fin. p.s. (473) (370) (292) (290)b. to fin. p.s. (126) (194) (176) (164)

Other Capital ExT.. 30 43 103 60 90

Overlall Deficit (-) - 169 -429 - 1,322 587

.inarning, of the Deficit 133 169 6.429 1,322 -587

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

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

/1Z NEstimates fcr 1973 made on a project by project basis.

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

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

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the authorities overcame the low built-in elasticity of the tax system andsucceeded almost every year in increasing revenues from internal taxes at afaster rate than nominal output, the growth rate of total revenue collection(including import duties) lagged behind the moderate increase in currentexpenditures. As a result, government savings declined from a peak of 2.4%of GDP in 1969 to 1.5% and 0.9% in 1971 and 1972, respectively.

31. At the CIAP Country Review of January, 1972, the Government expressedits desire to intensify domestic resource mobilization efforts and establishedrevenue targets for 1972 and 1973. The authorities embarked on a number ofadministrative and tax reforms which, while failing to improve performance in1972, paved the way to a marked recovery the following year. Current revenuesin 1973 increased by 20% as a result of a recovery in import duties collectionsresulting from an upsurge in imports, increases in some tax rates, and improvedadministrative performance. Current expenditures, however, increased by only7% despite the higher cost of goods. As a result, savings on current accountrose from ¢ 842 million (or 0.9% of GDP) in 1972 to ¢ 2,205 million (1.8% ofGDP) in 1973.

32. The impressive increase in Government savings in 1973 was possiblenot only because of the increase in revenues but also because of a considerableloss in purchasing power of civil servants' salaries. The armed forces havesuffered less from inflation, a considerable part of their income being paidin kind. The increase in the price of food for the armed forces has accountedfor about 0 300 million, or one-half of the increase in current Governmentexpenditures. Capital expenditures in 1973 declined to 1.3% of GDP, as com-pared to 2.2% of GDP the previous year. This decline took place as a resultof the completion of some lumpy projects as well as the Government's aggregatedemand policies. The resulting overall surplus of 0 587 million helped toease demand pressures arising from increased private investment while contri-buting to meet the private sector's need for liquidity without impairingforeign exchange reserve accumulation.

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Table 9: CENTRAL GOVERNMENT FINANCES

(Percentage Ratios) /1

Actuals Estimate1969 /2 1970 1971 1972 /3 1973 /4

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

/1 Derived from data in current prices.

/2 The introduction of a sales tax increased revenues considerably this year.

/3 A legal reduction in import duties resulted in a sharp fall in dutycollectiona.

/4 The preliminary estimate of GDP in current prices would appear to over-state the price level. Any overstatement of nominal GDP would resultin an understatement of ratios to GDP.

Source: Tables 3 and 8.

Consolidated Public Sector

33. In the overall public sector, excluding public banks, the CentralGovernment has, since 1969, with the exception of 1972, contributed more topublic savings than all the rest of the public entities combined. This de-monstrates the importance of the financial position of the Central Government,which has not only to supply its own needs, but also to cover through transfersthe operational deficits of some of the entities as well as contribute to thefinancing of some of their capital expenditures. The municipalities tradi-tionally have been able to finance from their own sources both their currentand capital expenditures and are expected to continue to do so in trhe future.Among the decentralized agencies, the Social Security Institute generatesconsiderable savings, which do not compensate, however, for the deficit ofthe other agencies in the group (the biggest deficit is produced by rL.e Na-tional University of Asuncion). Public enterprises, the main invevDo; inthe public sector, generate considerable savirLgs. These savLngs coae "lors.exclusively from the electricity enterprise (ANDE), and the teiecouaunticatLonscompany (ANTELCO). These two enterprises have consistently maintained profit-making tariff policies. In contrast, the deficit ridden airlines (LA?) an.railway operation are relatively small, making the burden for the CentralGovernment less critical than in other countries. The UN-IBERD transport study

Table 10: CONSOLIf)ATED PUBLIC SECTOR

(In Millions of Current )

Actuals Estimate

1969 1970 1971 1972 1973

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

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

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

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

Source: PDanrming Office, .Iinistry of Firna-vce &nd IBRD staff.

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for Paraguay proposed two possible alternatives for resolving the railwayproblem: (1) close down the railway or (2) proceed to adjust tariffs,makelimited improvements and keep it in operation. As for the airline, consider-able tariff increases for domestic flights were suggested by the same studyas a means of reducing the deficit.

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

35. Largely because of the trends evident in Central Government finances,aggregate public sector savings increased from 2.2% of GDP in 1972 to 2.8% ofGDP in 1973 while aggregate public investment declined from 5.7% of GDP in1972 to 5.0% of GDP in 1973. These trends were accompanied by a relativeintensification of the use of external resources in financing investmentexpenditures. The share of aggregate public investment financed from externalsources increased in 1973 mainly as a result of a slowdown in tha executionof projects not amenable to external financing. Public sector savings fi-nanced some 57% of public investment expenditures in 1973.

Development Finance Institutions

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

37. The most financially unsuccessful program executed by thc BiNF inrecent years was the National Grain Program. The program's loan portfoliobalance and related accumulated interest (0 1.86 billion), much of whichwas in arrears, was transferred to the Paraguayan Government. The failureof this program was the result of a number of concurring factors. It wasover-ambitious in terms of financial and technical capacity as well asinefficient in the selection of borrowers. The areas chosen to carry out

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the program in many cases were inappropriate to grow wheat and weather con-ditions were most unfavorable in the first two to three years of the program.A substantial part of the losses incurred in the Grain Program should comefrom the recovery of loans which are in default by combining debt reschedul-ing and foreclosure.

38. At present the BNF is constantly forced to obtain short-termcredits to meet current demands and obligations. Its external debt, mediumand long term, by the end of 1972 was 3.6 times the Bank's equity and thecost of debt capital was 91.4% of earnings, with loans delinquent and indefault amounting to almost 16% of total pcrtfolio. Moreover, BNF's currentliabilities of 42,986 million (US$23.7 million) exceeded its current assetsof ¢2,644 million (US$21.0 million), including short-term loans, by 13%. Thedebt service of the BNF for the next five years exceeds B 10 billion. Anumber of solutions to the BNF problem are being considered. One would beto implement a financial rehabilitation plan under the existing structureaiming at recapitalizing the BNF in a reasonable period of time and improvingits management. A second possibility would be to break the institution intothree independent banks following the existing departmental demarkation ofactivities: Development department, agriculture and livestock department,and commercial department. 1/ A third possibility would be to create a newpublic development finance institution to compete with the BNF in some linesof credit. This institution would be capitalized with government funds butwould divest itself by sales to the private sector. In the short run, theexternal financial agencies contemplate the possibility of establishing in-dependent funds within the BNF for individual projects, following the patternof the Central Bank Livestock Fund in which the IBRD participates.

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

Prices and Wages

40. Paraguay's impressive record of continuous relative price stabilitysuffered a severe setback in the last three years. The Consumer Price Index,which in 1965-70 had increased at an average annual rate of 1.3%, rose in 1971by 5%, in 1972 by 9.2Z, and by 12.8% in 1973. The trend towards acceleratinginflation continues. The Consumer Price Index increased by 8.4% in January1974 and is expected to show a similarly large increase in February 1974.

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

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Table 11: CONSUMER PRICE INDEX: MONTULY VARIATIONS,1971 - 1973

(Percentages)

1971 1973 1973

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

AVERAGE 5.0 9.2 12.8

Source: Central Bank.

41. The external sector was almost entirely responsible for the 1971price increases and remained an important inflationary factor in 1972 and1973. The prices of Paraguay's main exports went up following improved ex-ternal demand conditions while prices of imports increased as world inflationaccelerated and the guarani remained pegged to the U.S. dollar through itsdevaluations. The first round of price increases was mostly reflected inthe food component of the Consumer Price Index. External demand led to sub-stantial domestic beef price increases in 1971-73. The ensuing consumer shiftto other foodstuffs was confronted with high prices for imported wheat anddomestic supply constraints. These factors transferred part of externalprice pressures to other domestically produced staple foods in 1972 and 1973(Table 12). While beef prices triggered off the inflationary process, infla-tion appears to have been increasingly feeding on itself. Beef price movementsaccounted for over three fourths of the increase in consumer prices in 1971,but in 1972 and 1973 their share declined steadily while that of otner productsincreased.

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Tadle 12: IMPACT OF DIFFERENT GROUPS OF CONSUMER GOODS ON THE OONSUNER PRICEINDEX AND ITS FOOD COMPONENT, 1971 - FIRST QUARTER 1973

(Percentages)

First Quarter1971 1972 1973

Consumer Food Consumer Food Consumer FoodPrices Prices Prices Prices Prices Przces

1. Percentage PointsPrice Increases 5.0 8.6 9.2 11.1 8.2 15.8

Due to Non-FoodConsumer Goods 0.7 - 3.7 - 0.4 -

Due to Food Products 4.3 8.6 5.5 t1.1 7.8 15.8(Beef) (3.8) (7.8) (4.0) (8.0) (2.0) (4.2)(Other Food Products) (0.5) (0.8) (1.5) (1.3) (5.8) (11.6)

2. As Percentage of TotalPrice Increases 100.0 100.0 100.0 100.0 100.0 100.0Due to Non-FoodConsumer Goods 14.0 - 40.2 - 4.9 -

Due to Food Products 86.0 100.0 59.8 100.0 95.1 100.0(Beef) (76.0) (90.7) (43.5) (72.1) (24.4) (26.6)(Other Food Products)(10.0) (9.3) (16.3) (27.9) (70.7) (73.4)

Source: Central Bank and Mission estimates.

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

43. Whiie these actions resulted in an appreciable increase in nominalwages, price increases forestalled rises in purchasing power. Real wagesdeciined steadily; in terms of the 1964 consuuer basket, real wages forAsuncior. workers fell by about five percent between 1969 and 1973 (Table 13).The nechanism of minimum wage increases resulted, however, in a somewhat moree>.a_itarian income distribution within the salaried workers category. Flatwage increases computed as a percentage of the minimum wage are usuallyZranted to private sector employees whenever the minimum wage is adjusted;-zh-i procedure .has tended to reduce salary differentials.

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

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

Average 1969 100.0 100.0 100.0Average 1970 103.2 99.1 104.1Average 1971 107.1 104.0 103.0June 1972 (111.3) (111.0) (100.3)December 1972 (111.7) (118.0) (94.7)

Average 1972 111.5 113.6 98.2June 1973 (116.0) (127.9) (90.9)December 1973 (126.6) (134.7) (93.9)

Average 1973 121.3 128.2 94.6

/1 Based on a 1964 sample.

Source: Central Bank.

44. Although there is no systematic collection of data regarding ruralwages real wages in the countryside appear to have increased in the lasttwo-to-three years. Rural incomes are better protected from inflation sincean imDortant part is paid in kind. Moreover, with increasing agriculturaland l;vestock activity, severe manpower shortages have developed at the peakof the season. Rural cash wages are reported to have increased in 1973 byas much as 50% in some areas of the country.

}Ionetary Situation

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

46. The monetary fears were dispelled in the second half of tae year.Net Central Bank credit to the public sector contracted and credit to theBNE fell i 200 million short of the net advances anticipated at mid-year.The Central Bank, moreover, reduced net credit to the Commercial Baiks. Asa result, domestic credit contracted between June and December, 1973 anddespite a further i 832 million reserve accumulation, currency in circula-tion increased by only i 765 million (Table 14). The relation between high-powered money and GDP declined from 11.9% at the end of 1972 and over 12%at mid-year to 11.6% at the end of 1973.

Table 1La: SUNMARY ACCOUNTS OF THE CENTRAl, DANK, 1.969-1973

(Millions of (uaranies; erd of perlod)

Jne196'9 1970 1971 1972 1973 1973

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

Domestic Credit 5,567 6,028 6,589 7,677 7,968 7,901

Public Sector, net 4179 862 h 311 5,467 6 00?6Central Government 2, 1,93 2,251 3,213 33,39

Credit (2,733) (2,753) (3,175) (,209) (,451) (I,1.?7)Debit ( -688) ( -817) ( -924) ( -996) (-1,183) (-1,238)

Other Public Entities, net 1,717 1,926 2,060 2,251s 2,231 2,227Wlheat Conmiission, net 117 1495 391 347 503 -R

BNF 263 .473 1, 284 i 58 1 569 11976Coimmercial Banks 62 2B9 337 211 537Prior Import Deposits -bL -317 -2 -3 Other Assets, net 13 1,312 5 3

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

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

Mmorandum Items

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

Souarce: Centra3 Bank; IBRD Staff Estimates

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Balance of Payments

47. Paraguay's balance of payments experienced a striking change inthe 1970s. The combined influences of greater export volumes and improvedterms of trade permitted substantial increases in import capacity, the rateof economic growth, and the level of international reserves. The resourcegap, which averaged US$29.3 million in 1967-69 turned into a US$6.8 millionsurplus in 1972.

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

49. Export performance in 1973 continued its impressive record ofrecent years. During 1973, world commodity prices strengthened, particularlyfor beef, tobacco, industrial seeds, coffee, essential oils and soybeans.Crop production was boosted in 1973 by good weather conditions. As a result,exports increased by 47% over the previous year to a total of some US$127.0million--more than two-and-a-half times the 1966-69 average annual level.

50. Imports of goods increased at an average annual rate of 12% in1966-69. The growth of imports was especially strong in capital and in-ternediate goods, reflecting higher investment levels as well as some specu-latory stock building in the later years. In 1969-72 imports remainedstagnant, but in 1973 they increased by almost 50% reflecting an upswingin private investment and world price increases.

51. As many developing countries, Paraguay benefited in the 1970sfrom improvements in the external terms of trade. The most importantfactor in the sharp reversal of the resource gap has been, however, the in-crease in the volume of goods exported (Table 15).

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

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

1966 1967 968i 1969 1970 1971 1972 1973

LoEiz V.1,. 8,533 6,163 5,551 6,317 6,587 4,456 796 -volia 254,149 182,477 151,188 138.896 132,605 91,127 14,S30Uoit PrtNe 33.6 33.9 36.7 45.5 49.7 48.9 53.7

Val'.. 2,234 1.531 2,447 5,406 6,054 5,950 S.702 11,784Vol'kie 28,725 20,852 32,647 60,066 62,700 61,191 88,488 1.A,S15U.1t Pfti.. 77.8 73.4 75.4 90.0 96.6 97.2 98.3 102.6

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

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

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

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

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

K.i,. V.1.. 47 283 99 1 635 477 23 257701,1 1,465 9,431 3,329 19 23.21 13.599 863 3,S03'J.ir Price 59.4 30.0 29.7 52.6 27.3 30.6 26.7 67.6

94.tn 7.. V.I.. 1,647 633 616 585 510 105 312 63V.olu 13,074 4,971 5,308 5,971 5,331 1,064 2,929 574UaLt Pric 126.0 127.3 116.1 98.0 95.7 98.7 106.5 109.8

t..i.. od V 9g.,.bl V.1.. 609 375 466 275 305 1.372 579 1,596Vo.lv 7,341 5,654 4.751 3,084 3,480 9,907 7,407 9,265EN,it fti.0 63.0 *6.3 98.1 89.2 87.6 138.5 78.2 172.5

cff-.. Val. 1,959 1.458 1,895 953 882 1,016 3.116 2,666V.1,.. 2,855 2,184 2,879 1,517 1.269 1,473 4.152 2,85813,tb tN.. 686.2 611.6 658.2 628.2 695.0 689.7 750.3 932.5

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

So&., V.l. * 5 1 25 17 a 1 1.968 1,103V.olreo 8 8 340 318 108 8 11.754 6,5001.t,t NI,.. 73.' 125.0 73.5 53.5 74.1 125.0 167.4 189.7

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

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

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

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

Z-ti. .. l o0l. Va-.U 1.398 1,485 1,676 1,748 2,046 2.315 3,006 7,662Vol.. 421 441 496 493 634 581 673 976

oltL Frrtc. 3,320.7 3,367.3 3,379.0 3.545.6 3,227.1 3,984.5 4,466.6 7,850.4

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

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

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

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

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

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

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

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

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

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52. The main components of the capital account remained remarkablystable between 1966 and 1972. The capital account balance averaged US$25.7million and, with the exception of 1966 when the inflow fell US$10.0 mil-lion below the average, and 1969 when it rose US$7.0 million above, dis-persion was small (Table 16). The structure oLE tnese inflows also remainedvery stable. The multilateral credit agencies (IBRD, IDA, and IDB) werethe main source of funds and accounted for almost one-half of the capitalinflows. The application and uses of these inflows, however, experiencedsome variations, and a trend toward greater short-term capital outflowsseems to have developed over the period wnich may indicate either risingcapital flight or growing contraband imports. These trends have continuedin 1973 (Table 16).

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

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

Source 25.7 100.0 26.5 100.0

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

Uses 25.7 1OC.0 26.5 100.0

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

/1 Includes errors, ommissions, and border trade.

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

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II. MEDIUM-TERM ECONOMIC OUTLOOK

Economic Prospects for 1974

53. Current prospects for a continuation of rapid economic growth in1974 are quite favorable. Preliminary estimates indicate that under theimpetus of rapidly rising private and public investment activity, GDP growthmight well rise by 6.2% this year--almost half a percentage point abiove lastyear's growth. The propellants of this accelerated growth are expected tobe the livestock sector and the overall favorable export demand for Paraguayanagricultural and forestry products. Moreover, the initiation of the construc-tion of the Itaipu hydroplant toward year-end, as a joint venture with Brazil,is also expected to stimulate domestic demand for foodstuffs, constructionmaterials and particularly for fore.st products with which Paraguay is richlyendowed.

54. The achievement of a 6.2% growth rate in 1974 is predicated on anincrease in the volume of investment and a redirection of investment prior-ities. The overall level of investment will have to increase by about 10%and greater emphasis will need to be placed upon the commodity-producingsectors. Increased private sector activity is likely to fulfill both ofthese prerequisites for higher growth, provided the public sector does notpreempt the financial and real resources necessary for the expansion of theprivate sector and an environment conducive to higher private investmentactivity is encouraged. Compliance with the first condition will necessitatethe maintenance of the level of public investment at some 4.3% of GDP in1974. The second condition can best be met by continuing the overall economicmanagement policies pursued in the previous year which aimed at preventingan inflationary spiral, continuing the ongoing progress toward improvinglivestock policy and implementing the long-overdue reform of the fiscalsystem.

55. The authorities appear to be increasingly concerned by the courseof inflation. Given the Paraguayan economy's relatively small size, anti-inflationary policy is likely to be only partially effective so long asworldwide inflation persists. The Government strategy to contain inflationhas been by and large correct, except for the beef pricing policies followeduntil recently. As long as fiscal, monetary, and incomes policies continuein their present form, domestically generated inflation is likely to subside.Ilowever, inflationary pressures emanating from the external sector, especiallyincreased world petroleum prices, have become somewhat more threatening. Theprice of oil landed in Asuncion trebled in recent months. While retail pricesof petroleum products were increased somewhat during last year, by far thegreatest increase took place in February 1974, when average retail priceswere doubled. The first round of the latest price increase in petroleumproducts is expected to result in an immediate increase of some 3% in theConsumer Price Index, but its impact over the year is likely to be somewhatgreater. This increase and the projected price increases for wheat, meatand other staples, combined with the recent wage increase, may be expectedto generate in 1974 an inflationary pressure equal to or somewhat in excessof last year's.

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56. As indicated above (paragraph 18), recent Government actions onlivestock policy have intended to remove beef price and marketing controls.The authorities will need to follow carefully developments in the livestocksector during 1974 with a view to retioving the remaining controls by 1975and replacing them by flexible export: taxes to regulate internal and externaldemand. In addition, the authorities will find it useful to make a thoroughstudy of the structure, problems and needs of the livestock sector. Theresults of such a study will enable policy decisions to be made on adequateinformation regarding the size of the cattle herd, reproduction and take-offrates, consumption patterns and elasticities of demand, and the productionand financial structure of the exporting slaughterhouses.

57. Prospects for Central Government finances in 1974 appear to bereasonably good. While the projections are somewhat clouded by uncertaintyregarding the responsiveness of revenues and expenditures to increasingprices, the administrative improvements carried out during 1973, particularlyin the realm of customs administration, and the newly introduced revenuemeasures such as beef export taxes, increases in alcohol and gasoline taxes,and other minor adjustments, seem to indicate that Government current revenueswill increase by about 20% to 0 14 billion in 1974. Current expenditures,however, are expected to grow more slowly to a total of about ¢ 11.2 billion.As a result, budgetary savings of some ¢ 2.8 billion equivalent to 1.9% ofGDP are likely to materialize during the year.

58. The Government's projected current account surplus should be enoughto cover its capital expenditures without recourse to internal borrowing.

Table 17

CENTRAL GOVERNMENT CAPITAL EXPENDITrURES;ACTUAL, 1972; ESTIMATE, 1973; AND PROJECTION, 1974

(in Millions of Guaranies)1972 1973 1974

Resources for Investment Spending 842 2,205 2,810

Current Account Savings 842 2,205 2,810

Claims 1,521 1,660 2,810

External Debt Amortization 407 482 672Counterpart for External Loans 332 389 O79Non-Projectizable Investment 328 237 356Capital Transfers 454 552 703

Financial Gap 679 -545 -

Source: IDB, Planning Secretariat, and IBRD Estimates.

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

59. Despite the higher expected level of economic activity, the corres-ponding increase in import demand and the projected sharp increase iu pricesof Paraguay's imports, the country's balance of payments prospects in 1974appear to be reasonably good. Although the ceiling on official beef exportsis expected to effectively stop beef shipments from increasing over their1973 level, exports of goods are expected to increase by almost 17% in realterms during the year. Increased output of soybeans, cotton, tobacco, sugarand lumber are likely to account for most of the increase. The recent risein Paraguay's export prices is expected to slow down considerably in 1974,when the price index will probably increase by some 6%, as compared to theprevious year's rise of 41%. As a result, Paraguay's export earnings areprojected to increase by some 23% to a total of US$156 million in 1974.Imports of goods, however, are likely to grow by over 36% to US$150 million.Onlv 7.3% of this increase will represent increased demand for imported goodswhile the remainder will be due to higher import prices, particularly ofpetroleum products, flour and wheat. The increase in petroleum prices aloneis expected to have an impact of about USS7 million f.o.b. assuming noincrease in consumption takes place as a result of the recent sharp increasein retail prices. As a result of these trends, the country's trade balancesurplus is expected to decline from about US$16 million in 1973 to aboutUS$6 million in 1974. The services accounts are projected to transform thissmall trade surplus into a current account deficit of almost US$20 millionfor the year, as compared with the 1973 overall deficit of US$10 million.

60. The current account deficit is expected to be fully covered bycapital inflows in spite of their projected decline. As a result of aprojected decline in disbursements on medium- and long-term loans and ofan anticipated increase in amortization payments, net capital inflows arenow expected to fall from US$28.5 million in 1973 to US$19.9 million thisyear. This decline would preclude any further accumulation of foreignexchange reserves. The projected reserve level of US$53 million at the endof the vear is nevertheless likely to be appropriate and would be equivalentto some four months' imports.

Medium-Term Prospects, 1975-79

61. Paraguay's medium-term development prospects appear to be promising.The country's objectives of accelerated economic growth and more equitabledistribution of income appear to be attainable and the Government's strategyof concentrating the growth effort in the agricultural, livestock andforestry sectors is consonant with the achievement of these goals. Thepotential for further agricultural growth lies in a variety of favorablefactors: the existence of large areas of unutilized land of Rood to excellent

Table 18: SELECTED ECONOIIC DEVELOPMENT DATA

Average Actual Eatieate Pro ections Crovrh Rates As Percent,e of GDY1967-69 1972 1973 1974 1975 1976 1974- 1965-70 1970-73 1973-75 1975-79 1'92 1974 1976 1919'

Natlonal Accounts - Millions of 1972 US Dollars

CDP 630.6 769.0 814.1 864.7 918.1 975.1 1.201.3 4.6 5.2 6.2 7.0 100.0 98.9 99.9 1:0.7Caine fro. terms of trade 1.4 . 25.9 9.3 4.8 0.8 -7.8 - - - !.1 0.1 -0.7

Gross donestic income 632.0 769.0 840.0 874.0 922.9 975.9 1.193.5 4.9 5.7 4.9 6.6 100.0 100,0 100.0 100.0

Imports (incl. NFS) 128.4 99.4 139.1 148.9 159.3 170.4 220.3 3.2 9.9 7.0 8.4 12.9 17.0 17.5 18.5

Exrports (import capacity) 89.1 106.2 138.9 141.8 153.5 159.9 191.3 -0.3 22.3 5.1 5.7 13.8 16.2 16.4 16.0

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

Natlonal savings 61.9 125.3 147.7 168.1 17t.6 181.3 2Z6.7 0.5 26.6 7.8 7.2 16.3 19.2 18.6 18.9

Dmestic savings 66.1 134.1 156.9 176.2 177.8 184.5 230.5 1.9 23.6 6.4 6.7 17.4 20.2 18.9 19.3

Price rndLcrs (1972 * 100)

CDP deflator 82.8 100.0 122.8 147.3 169.5 186.4 234.7 1.3 13.0 17.5 8.5Import price Index 74.8 100.0 109.4 136.8 143.3 150.8 175.8 1.6 9.0 14.0 5.2Export price index 76.5 100.0 140.9 148.9 Le9.4 151.7 166.6 2.2 11.8 3.0 2.8

Terms of trade index 102.3 100.0 128.8 103.9 104.3 100.6 95.1 0.6 2.5 -9.1 -2.1

Public Flnance - Millions of US Dollars!'

Current receIpts 60.2 75.2 90.7 79 86 91 118 7.2 .3.1 7.9 8.2 9.8 9.0 9.3 9.9

Currenc expcnditures 50.1 68.5 73.2 64 68 - 72 90 7.8 -4.4 6.8 7.3 8.9 7.3 7.4 7.5

Budgetarv savin£ 10.1 6.7 17.5 15 18 19 i8 4.0 3.5 12.2 11.7 0.9 1.7 1.9 2.3

Other publlc sevtig 9.1 10.0 10.7 10 12 14 24 3.4 -7.7 11.8 19.0 1.3 1.1 1.4 2.0

Public sector investoest 34.2 43.9 49.7 37 41 49 93 7.9 13.2 1.2 22.8 5.7 4.2 5.0 7.8

|1 1974-79 projections in 1972 prices. In constant prices, 1973 was aa follows: Current receipts US$73.9 million; Current expendiltures, US$59.6 million; ,Budgetary Saving,

Us$14.3 million; Other Public Savlgs, US$8.7 million; Public Sector Investisent, US$40 million.

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quality; a great. potential for hydroelectric development which could serveas a base for future agricultural processing and forest industries; and, mostimportant of all, a ready market for a large number of products in neighboringcountries, the United States and Europe.

62 . Provided that the satisfactory standards of economic managementachieved in 1973 continue, the Government'. objective of sustaining themedium-term growth rate of output at between 6% and 7% per annum does notappear to be above the possibilities of the Paraguayan economy. The shiftto this higher growth path would be a considerable improvement over the 4.5%growth rate achieved in the 1960n and would permit steady improvement onthe order of about 3.5% annually in per capita incomes. As in the immediatepast the principal sources of growth are expected to be external demand andinvestment demand. With regard to the former, while the world price outlookfor the country's exports is not particularly bright, no external marketconstraints are likely to develop in the immediate future. Thus, providedthe country can expand its output of agricultural, livestock and forestryproducts, the outlook for export growth should be favorable. As for private4nvestment demand, if it rema:Lns unhindered by excessive claims on resourcesby the public sector it is likely to continue its growing trend of the 1960sand early 1970s and may be expected to attain an average of roughly 15% ofGDP during 1975-79, as compared with 10% during 1967-69. At the same time,public sector investment could be maintained at approximately 5% to 7% ofGDP within the framework of an overall level of gross investment of some20% to 22% of GDP.

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

64. The need to reinforce project planning and execution capacity ofthe public sector requires the Government's immediate attention if thecountry is to take full advantage of the development opportunities offeredby the construction of the gigantic Itaipu hydroelectric plant financed byBrazil. This need is further accentuated by the Yacireta-Apipe and Corpushydroelectric plants to be constructed jointly with Argentina. In the caseof Itaipu, the Treaty regulating the construction of the project accords2araguay the right to supply up to one-half of the inputs needed for theconstruction of the dam. At this moment, the country is not in a positionto make full use of the captive market for incremental sales of goods andservices that Itaipu offers, and which could be instrumental in determiningits future productive base. To realize this potential would require asubstantial acceleration in the annual rate of growth of public investmentover the medium-term--from 13.2Z during 1970-73 to about 23Z during 1975-79.TAe Government, therefore, should give a high priority to the task ofreinforcing planning and project execution mechanisms.

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65. The serious fiscal constraints of the early 1970s placed the needto increase Government revenues in the forefront of development policy.While the authorities continued their efforts to introduce structural reformswhich would increase the built-in elasticit;y of the tax system and lessen itsdependence on customs revenues, the pressizig need for funds to carry outdevelopment projects relegated this effort to a secondary place. TheGovernment's commendable and successfuL efforts to raise revenues have beenachieved, to a certain extent, at the expense of adding to the coaplexityof the tax system and increasing che incidence of some taxes (such as stam,taxes) not conducive to promoting economic efficiency. Now that the fiscaisituation does not give cause for immediate concern, the Government oughtto renew its efforts to improve the structure of the system. Programs suCL1as the cadastral survey now underway and the proposed income tax reformshould be accelerated, inile revenue objectives could be placed on increasingGovernment savings from 1.8% of GDP in 1973 to about 2.3% in 1979, i.e.,a leveli which would be compatible with public investment needs during theperiod.

66. To achieve the desired growth objectives, imports of goods andservices would have to increase at an average rate of about 8.2% per annumbetween 1974 and 1979. The present outlook for international prices indicates,however, that the average price of Paraguay's import requirements is likelyto increase at an average rate of 5.5% in the quinquennium. Thus, the costof sustaining the desired level of imports would increase from almost US$200maillion in 1974 to some US$350-400 million in 1979 (Table 19). A large pro-portion of the import bill could be financed out of increased export earnings.Provided that the economic environment remains favorable, Paraguay has thepotential to increase its exports of goods and services at an average rateof 8.5% per annum between 1974 and 1976. The prices of Paraguayan exports,however, are only likely to increase at an average rate of 2.8% per annum,and total export earnings could increase therefore at a slower rate than theimport bill, from about US$190 million in 1974 to about US$325 million in1979 (Table 20). Given the implicit deterioration anticipated in thecountry's external terms of trade, the deficit on the balance of goods andservices is likely to increase substantially during the period. Taking intoaccount the probable developments in other items of the current account, thedeficit on current account is likely to increase from about US$20 million in1974 to almost US$60 million in 1979.

67. The above trends in the country's current account imply that inorder to achieve its growth objectives and its foreign exchange reserves -ina manner consonant with the expected increase in the size of the -mpor, bil;,Paraguay would need a total net capital inflow of about US$235 ruilrn iuaing1974-79 (Table 21). Assuming that about US$45 millior direct fo:em iavest-ment takes place during the period (based on recent experience) and tk.arofficial sources provide the country with some US$20 rillion -in ea_iaa g-an:s,Paraguay would rieed to assure a net capital inflow of LAout u>$17 mllorfrom medium- and long-term loans during 1974-79. Of these reeds, s uSS-20million are likely to be drawn down from. loans contracted before eeer J'.'e 5

1973. The remaining US$155 million woulG have to come from loar,s to be con-tracted during 1974-79.

Table 19: IMPORTS, 1967-69, 1972, 1973 AND PROJECTIONS, 1974-79

(In Millions of US Dollars)

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

A. Constant (1972) PricesFood 6.9 5.7 4.2 6.7 6.4 5.9 5.,9 5.8 5.8Other consumer goods 31.5 23.6 25.8 31.5 33.1 34.8 37.2 39.8 42.6Petroleum 6.4 8.1 9.0 9.0 9.7 10.4 11.4 12.6 13.8Other intermediate

goods 14.6 12.2 1-9.6 22.3 24,7 27.7 31.0 34.7 38.9Capital goods 26.2 22.4 42.3 39.2 42.1 45.2 49.1 53.3 57.9Total goods f.o.b. 85.6 72.0 100.9 108.4 116.0 124.0 134.6 146.2 159.0C.i.f. adjustment 9.3 6.9 9.6 10.2 10.9 11.7 12.8 13.9 15.1Total goods c.i.f. 94.9 78.9 110.5 118.6 126.9 135.7 147.4 160.1 174.1Other non-factor sves. 33.5 20.5 28.6 30.3 32.4 34.7 38.2 42.0 46.2Total goods and NFS 128.4 99.4 139.1 148.9 159.3 170.4 185.6 202.1 220.3

B. Price Indices (1972 100)FoodT1 114.5 100.0 126.2 211.6 223.8 208.4 211.9 210.3 208.6Other consumer goods 51.7 100.0 120.9 133.0 146.3 158.0 167.5 177.6 188.2Petroleum/2 70.3 100.0 138.9 212.9 176.0 183.6 193.0 202.3 211.9Other intermediate

goods 93.2 100.0 97.4 133.0 146.3 158.0 167.5 177.5 188.2Capital goods 83.6 100.0 100.2 116.8 124.5 131.0 137.9 145.0 152.5Non-factor services 73.1 100.0 107.9 116.8 124.5 131.0 137.9 145.0 152.5 1Weighted average

(derived from ro

A and C totals) 74.4 100.0 109.1 132.8 139.5 146.8 154.5 162.5 170.9 1

C. Current PricesFood (or foodgrains) 7.9 5.7 5.3 14.2 14.3 12.3 12.5 12.2 12.1Other consumer goods 16.3 23.6 31.2 41.9 48.4 55.0 62.3 70.7 80.2Petroleum 4.5 8.1 12.5 19.2 17.1 19.1 22.0 25.5 29.2Other intermediate

goods 13.6 12.2 19.1 29.3 36.1 43.8 51.9 61.6 73.2Capital goods 21.9 22.4 42.4 45.8 52.4 59.2 67.7 77.3 88.3Total goods f.o.b. 64.2 72.0 110.5 150.4 168.3 189.4 216.4 247.3 283.0C.i.f. adjustment 6.8 6.9 10.4 11.9 13.6 15.3 17.7 20.2 23.0Total goods c.i.f. 71.0 78.9 120.9 162.3 131.9 204.7 234.1 267.5 306.0Other non-factor avcs. 24.5 20.5 30.9 35.4 40.4 45.5 52.7 60.9 70.5Total goods and NFS 95.5 99.4 151.8 197.7 222.3 250.2 286,8 328.4 376.5

/, Weighted for grains.

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

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

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

(I. Th.o.,od. of t'S DoIlaar)

Average1967-69 1972 1973 1974 1975 1976_ 1977 1978 1379

A. Cont-rt (197?1 Price,

1. Lurber 17.949 9,498 10.551 11,606 12,767 14,043 15,W7 16,992 18,6912. Be-f 18,828 29,788 32,076 32,076 33,038 34,029 35,050 36,101 37,191,3. Hid" -d ti, 2,536 3,665 3,225 3,225 3,322 3,421 3,524 3,6296 3,7374. Liv-ntv k bv-produ-t, 118 461 610 610 628 647 666 U6 775. Tob--,o 4,797 6,681 5,457 7.172 7,889 8,678 9,546 10,500 11,5506. lbld-s ri31 Seeds 850 4,984 5,519 10,135 11,149 12,263 13,489 114,38 1?6,327. Klime 114 23 102 105 108 I:I 1 1ii 3218. MLte toe 577 312 61 62 63 65 67 69 719. Fruit, .. d -egrtable, 352 579 725 740 754 769 804 OO 816

10. Coffer 1,696 3,116 2,145 2.295 2,456 2,628 2,8a2 3,009 3,23911. CoLton 3,230 3,815 9,350 14,075 15,483 17,031 18,734 20,608 3 ,3612. S.,ga- 37 1,968 1,088 2.009 2,210 2,431 2,674 2,942 3,63613. Ca e Sprit,. 7 175 245 294 352 423 50° 609 73314. Coor--t ill 2,576 2,345 3,648 4,016 4,216 4,428 41,6L.9 14,882 5,32615. Tung oIl 1,869 3,090 974 1.023 1,074 1,128 1,3184 1,21L4 3,2316. Otitc oil, 75 259 1,398 1,608 1,8149 2,126 21,14. 1,812 3,2 3,17. Etsentll oifls 2,131 3,006 4,359 4,882 5,468 6,124 6,659 7,682 8,6t418. Cai, n-d -og,llers 1,366 1,473 4,459 4,994 5,294 5,611 5,948 6,305 6,68319. Q-ebr-cdtu-r,ct 2,504 2,396 2,395 2,443 2,492 2,542 2,593 2,645 2,69820. Portl-1y ccect 26 267 136 163 187 216 2169 288 33321. rl.nlocIr-- 97 59 62 60 62 64 66 61 7022. Wild .mim.l nkisn 354 226 273 246 221 i99 179 161 14523. Other irdmstrial product, 1.610 7,767 866 935 1,010 1,091 1,178 1,213 1,371424. Other goodc 318 235 337 344 351 358 365 372 1 3025. Total goods 64,017 86,188 90,061 105,128 112,443 120,426 129,130 134,233 5149,0O626. Uonfactor oc,vice. 23,667 20,000 22,984 27,397 36,225 38,702 43,169 46.372 50,066

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

S. Pric- Indices 12972=1O)

1. L-bcr 51.0 100.0 111.7 116.6 128.1 141.6 153.2 166.5 183.22. Beef 74.6 100.0 126.0 140.5 140.5 140.5 L1.5.3 150.2 355.03. Hides and ski,s 48,6 100.0 121.2 127.4 139.8 139.8 149.1 155 3 161.54. Livento-k by-products 266.1 100.0 211.5 235.6 235.8 235.8 243.9 25?.1 260.25. Tobacco 93.9 100.0 136.7 140.9 149.6 159.6 168.3 176.9 135.46. Ind.strial seeds 86.2 100.0 220.2 141.2 133.2 130.7 132.2 135.7 142.17. haisc 112.3 100.0 252.0 309.7 284.6 258.4 253.2 2L5.3 250. 58. mate t-a 105.9 100.0 103.3 116.4 108.5 108.5 1lG6.5 108.5 136.59. Fr-it. and vegetables 105.7 100.0 220.1 229.2 238.4 247.8 257.8 268.0 278.7

10. Cyffen 84.6 100.0 124.3 140.3 130.7 130.7 13J.7 230.7 2140.311. Cotton 71.1 100.0 124.3 187.5 175.5 170.6 163.6 159.2 152.412. SogXt 37.8 100.0 101.4 115.4 121.2 126.3 133.6 210.3 146.913. Cane spirits 414.3 100.0 98.8 114.2 88.4 93.4 98.6 109.1 114.114. Co.on.t oil 79.3 100.0 82.6 114.1 114.1 113.2 112.3 J.1.3 1:'7.I15. Tong oll 135.3 100.0 199.0 181.4 176.4 175.1 173.9 171.3 67.516. Other oIls 82.7 100.0 118.5 122.5 121.9 119.6 117.3 114.L 110.417. E-sentiol nils 76.8 100.0 175.8 190.3 202.8 213.4 224.7 236.2 248.618. Cakes a.nd c-pellers 67.7 100.0 252.8 162.2 153.0 150.1 151.9 156.0 16i.219. Cuebranh.o etract 79.2 100.0 100.4 108.7 115.9 121.9 126.3 134.9 11.1.920. Portlond Oroent 1500. 100.0 91.2 99.4 105.4 111.4 216.5 122.8 129.521. P..lo 1ohs 114.4 100.0 75.8 81.3 86.6 91.1 95.9, 100.9 106.122. Wild an.t.i1 kins 196.9 100.0 94.9 102.9 109.6 115.3 121.4 127.7 1311.323. Other ind..trial products 224.0 100.0 403.6 437.0 467.7 489.9 515.5 5.2.14 570.624. Other products 139.9 100.0 148.4 161.0 171.5 180.3 189.9 199.7 210.023. Total goods 76.5 100.0 140.9 148.9 149.4 151.7 156.0 166.3 166.$26. NonfaCtor aervic.s 73.1 100.0 107.9 116.8 124.5 131.0 137.6 3L4.7 152.2

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

C. Current Prie,

1. Liober 9.145 9,498 11.784 13,533 16,380 19,884 23,665 28,292 314,2422. Beef 14.053 29,788 40.410 45.067 46,418 47,811 50,928 514,224 57,6353. Hides and skins 1,233 3,665 3.909 4.109 4,644 4.783 5,251 5,636 6,0374. Liv.ot.ck by-products 314 461 1,290 1,438 1.481 1,526 1,621 1,729 2,81,05. Tobacco 4.506 6,681 7.457 10,105 11,802 13,852 16,061 18,575 2.1.4146. Irdontrlal seeds 733 4,984 12,155 14,311 14,850 16,028 17,8.32 20,135 23,0307. Y Bala 128 23 257 325 307 287 289 289 3038. KMte tea 611 312 63 72 68 71 73 75 939. Frolrn -od vegetable. 372 579 1,596 1.696 1,798 1.906 2,022 2,11h 2,274

10. Coffee 1.435 3.116 2,666 3.220 3,210 3,435 3,675 3,933 ,51615. Cotton 2.297 3,815 11.622 26,391 27,173 29,055 3C,6L9 327,04 34,5.612. Sugar 14 1,968 1,103 2,318 2,679 3,070 3,572 L,128 4,7i;13. Cane spirit. 29 175 242 336 312 395 503 6fi, 831414. Coccnut oll 2,043 2,345 3.012 4,5S2 4,810 5,012 5.,21 43 5,65;1I. Tung ol 2,529 3,090 1,938 1,856 1,895 1,975 2,059 ,3.3 2,1a316. Other oil, 62 259 1,656 1,970 2.254 2.543 2,dc8( ,3, 36,5S917. F.ment.il olIn 1,636 3,006 7,662 9.290 1 .069 12,069 15 ,4i2 1,45J 2), 3-018. Cakes and copeller 925 1,473 11.276 8,100 8,100 8.422 9,035 9,836 10, 4019. Quebracio extract 1,984 2.396 2,405 2,656 2,888 3.099 3,327 3,566 3,5?t20. Portlnd .,ntne 39 267 124 162 197 241 291 354 43'21. Pisle clocrIcs 111 59 47 49 54 58 63 62 722. Wild -l-n,nI bki.. 697 226 259 253 242 229 2:7 206 1 3523. Otlher Inrltal prodota 3,606 7,767 3.495 4,08o 4,724 5,35 6,0?6 6,90,2 7,614024,. Otli-r prodhct, 445 235 500 5%4 b02 645 93 7143 79!;25. 1otal -Jod 68,947 86,168 126.929 1s,,,479 167,977 182,741 201.4c/, 223,2bO 2749,26526. b,,nl, i Oe e_ic... 17,300 20J000 24,800 32,000 45,100 50.700 59.400 67,1W0 76 ,. X0

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

/Ir in, hI.... rcA,.i en...).,,,-. f,,,nc,, ,c tr I Tt.,ip,, -1 n Y-trrf-.Api, 1,-).

Table 21: 9ALANCE OF PAYMFNIS. 1967 69, 1972, i973AND PROJECIIONS, 1974-79

(In Millions of US Dollars, ctirrent prices)

Average1967-69 1972 1973 1974 _195 1976 <L 1978 > 9

Current Prices

1. Imports (incl. NFS) (-95.5) (-99.4) (-151.8) (-197.7) (-222.3) (-250.2) (-286.8) (-328.4) (-376.5)

2. Exports (incl. NFS) (66.2) (106.2) (151.7) (188.5) (213.1) (233.4) (260.8) (290.3) (324.5)

3. Balance of goods & NFS -29.3 6.8 -0.1 -9.2 -9.2 -16.8 -26.0 .38.1 -52.0

4. Factor Services - total -5.6 -11.1 -12.5 -13.2 -11.3 -7.4 -8.1 -8.6 -9.5

a. Interest on public debtk/ (-4.5) (-9.6) (-11.1) (-12.0) (-10.0) (-6.1) (-6.6) (-7,0) (-7.7)

b. Profits and dividends (-1.5) (-2.4) (-2.5) (-2.4) (-2.5) (-2.6) (-2.8) (-3.0) (-3.2)

c. Other factor services (0.4) (0.9) (1.1) (1.2) (1.2) (1.3) (1.3) (1.4) (1.4)

5. Workers remittances _ - - - - -

6. lurrent transfers, net 2.5 2.3 2.5 2.5 2.6 2.7 2.7 2.9 3.0

7. Balance on current acc. -32.4 2.Q -10.1 9-17.9 -31.4 -43.8 -58 5

8. Private direct investment 2.9 S,4 6.0 6, 5 7.5

9. Official capital grants 2.6 2.7 3.0 3.0 3.0 3.0 3.5 3.5 3.5

10. Public M & LT Loansa. Disbursements (26.7) (24.8) (30.9) (26.2) (26.7) (30.2) (34.2) (39.6) (43.0)

b. Repayments (-4.6) (-7.1) (-10.8) (_15.3) (-15.7) (-13.0) (-13.8) (-13.6) (-.14.8)

c. Net disbursements 22.1 17.7 20.1 10.9 11.0 17.2 20.4 26.0 28.2

11. Other M & LT, net - _- - - - -

12. IMF drawings - 2.2 - - - - -

13- n-.her short term 3.6 -13.1 4.0 - - -

14. Use of reserves 0.6 -10.4 -22.4 - -2.6 -7.0 -9.1 -10.4 -12.0

15. Uncovered gap - - _ - - 1.3 9.1 16.7 30.3

Total capital acc. 32.4 2.0 10.1- 19.9 17.9 21.5 31,4 43.8 58.5

Memo Items

16. Imports after cuts in 15 95.5 99.4 151.8 197.7 222.3 248.9 277.7 311.7 346.2

17. Reserves (net) and period 8.9 30.6 53.0 53.0 55.5 62.6 71.7 82.1 94.1

18. Debt service ratios

PubliC 13.8 15.7 14.4 14.5 12.1 8.2 7.8 7.1 6.9

Total2/ 16.0 18.0 16.1 15.8 13.2 9.3 8.9 8.1 7.9

19. External debt outstandings

Disbursed (beginning of period)

Public 40.3 106.5 114.9 125.8 136.8 155.3 184.8 227.5 286.0

Total,...... .... ......

IBRD 0.1 8.0 10.2 11.8 14.5 19.2 25.4 33.0 41.6

IDA 5.7 19.9 23.0 24.8 27.1 29.6 33.0 37.1 41.3

20. TBRD debt service as 7. of

Public debt service 1.1 6.6 4.1 5.1 5.8 8.9 10.3 12.6 12.9

Total debt service 0.9 5.8 3.7 4.7 5.3 7.8 9.1 11.0 11.3

21. IDA debt services as % of

Public debt service 1.1 1.2 1.4 1.1 1.2 2.1 2.0 2.4 2.2

Total debt service C09 1.1 1.2 1.0 1.1 1.8 1.7 2.1 1.9

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

2/ Includes profit and dividend remittances.

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

- 35 -

68. It is estimated that to assure the additional capital inflow ofabout USS155 million during 1974-79, new external commitments entered into byParaguay during the period would be at least US$335 million. On the basisof existing programs, Paraguay may reasonably expect to contract new loanswith international organizations for a total of almost US$200 million.Furthermore, the country is likely to be able to obtain loans and credits forover US$60 million with official bilateral sources of finance and aboutUS$20 million with other traditional lenders. Paraguay may, therefore,reasonablv expect to enter into new commitments of a concessionary and semi-concessionary nature for a total of US$250-300 million during 1974-79.However, additional commitments of almost US$60 million in the form ofsuppliers' credits, financial credits, etc., would be needed to fill thecountry's external gap.

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

70. Paraguay's outstanding and disbursed external public debt, repayablein foreign currency, is projected to increase from about US$127 million in1973 to about US$300 million in 1979. Despite this increase, the country'sdebt servicing capacity is expected to improve. The debt-service ratio isprojected to decline from about 14.4% in 1973 to somewhat below 10% in 1979,while the capacity to import is expected to increase at a satisfactory rate(5.5% per year). This result follows from the projected ir.crease in thecountry's exports, a trend which already ensued in recent years. Given theseexpectations and provided sound economic management continues, Paraguay shouldremain creditworthy for considerable long-term borrowing on conventional terms..Nevertheless, intensive efforts should be made by the Government to restrictshort- and medium-term borrowing as much as possible. At the same time,because of poverty and appropriate overall economic policies, the countrysihould also remain eligible for assistance on concessionary terms for a partof its capital requirements.

Table 22: Public Investment, 1965-73 anid Projections, 1974-79

(In Millions of 1972 us$)1/

Average Total1967-69 1972 1973 1974 1975 1976 1977 1978 1979 1974-1979

Gross Domestic Product 630.6 769.0 814 865 918 975 1,045 1,121 1,201 6,125Investment 105.4 127.3 157 183 186 195 226 242 260 1,292

of which: private sector (64.1) (83.4) (117) (146) (145) (146) (163) (166) (167) (933)

Public Sector Investment 41.3 43.9 40.0 37 41 49 63 76 93 359Projectizable 27.2 18.6 22.0 16 16 23 34 45 58 192

Foreign Exchange Costs (17.0) (12.0) (16.0) (10) (10) (14) (21) (28) (37) (120)Local Currency Costs (10.2) (8.0) (9.0) ( 6) ( 6) ( 9) (13) (17) (21) ( 72)

Non-Projectizable 14.1 25.3 18.0 21 25 26 29 31 35 167

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

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

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

Cost-Sharing FormulaeExternal Financing as % ofTotal Project Costs 72.1 74.2 76.4 74.4 70.0 71.3 70.3 70.1 70.0 70.1

Foreign Exclange Financing ofLocal Costs as % of Local Costs 15.7 15.0 44.0 31.7 20.0 26.7 22.3 22.4 17.1 22.2

Memorandum Items

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

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

Source: IBRD staff