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No. E-189a

RESTRICTED

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

PARAGUAY

ECONOMIC POSITION AND PROSPECTS

November 15. 1951

Economic Department Prepared by: Jorge A. Montealegre

Douwe Groenveld

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PARAGUAY

BASIC STATISTICS

Area

Population - ......... ~ .-F;ation<::l Income

GO'1Ternrnent l"inance

General revenues General expe~ditures Internal debt

Offici;:ll Excha~...!!:ansactions On Account of

E:xrorts Imports

External Debt (October 3, 1951) -Dolle>r Sterling Cruzeiro Argentine pesos

Total

Gold and Fo!eign Exchange December 31, 1939 December 31, 1946 D€cerGbel~ 31, 'l949 Dec:::mber 31, :::.s~O September 30, 1951

~1;~n8Y Supply

December 31, 1939 Decereber 31, 1946 DeceMber 31, 19h9 December 31, 1950 June 30, 1951

Cost-ot-Living Index (Asurldon)

1939 1946 1949 1950 1951 (June)

, I

160,000 square miles

1.2-1.h million

About USO 150 million

1949 r; 58.9 million ~ 95.3 million 1t115.0 million

US":; 28 .1 million US~:;30.5 million

US;) equivalent

Ji.6?, million O.6u million

10.32 million .95 million -16.57 million

us:) 0.6 million US~) 11.1 million US', 3.1 million ust;; 12.5' million US~; 2041 million

¢ , .... 7 -'1' .J-L • m1.-'. lon ¢ 58.5 mi11-'Lon 0'150.9 million 0229.5 million rl29R 1 ,.,.,. 'P ~ • Yr,L.J.J.on

.100 216 512 872

1.,128

1950 G 8h.5 million ¢ 89. ') millio~ ¢119.5 million

1950 . UC::ci'3r:' 6 '11' u,);;J. mJ.. :lon USf;,23 •. 0 million

% of Total

11116/51 No. 596

TOTAL EXTERNAL TRADE (MILLIONS OF U.S. DOLLARS)

PARAGUAY

6 nn"TT""~~""""nn""TT,,,,nnno .. ,,~6 MONTHLY AVERAGES

4 I ~~-------, ~--------~------~---+-----------+----------~4

2 ~~~~.-~ r=~----~~-----------+-----------+----------~2

o ~~~uu~~wu~~~~~~~~~~~~wu~O

'40 '47 '49 '51 0 J 0 J 0 J 0 J 0

1949 1950 1951 1952

EXPORTS OF PRINCIPAL COMMODITIES (VOLUME INDEX, 1940 = 100)

500.---~~~--~----~--~--~----~--~--~--~----~~500

YEARLY

4oor---------------------+---------------------~------~400

300~------------------~H+----~~--------~~--~------~300

200r---------~~----~--~------~---==-----~~------~200

QUEBRACHO EXTRACT O~--~--~----~--·-L----~--~--~----~--~--~··~·~--~--~O

'40 '41 '42 '43 '44 '45 '46 '47 '48 '49 '50 '51 '52

SERVICE PAYMENTS ON TOTAL EXTERNAL DEBT* OUTSTANDING OCT. 10,1951 (MILL IONS OF U. S. DOLLARS)

5 5 I

4 4

3 3 !

,TEREST

.::.1;::.: .. :::.:-:.:.:.:.: ..... ~~ ,t:::TOTAL 2 2

x .x ........... ~

>' AMORTIZATION

o 1951 1955

•• + •• ... : .... ~

~ 1960 1965 1970

*Does not include poyments upon on inter-governmental debt to Brazil of 90.96 million cruzeiros (U.S. $ 4,916,000), on wh ich no transfers hove been mode after 1947.

I.B.R.D. - Economic Dept.

o

11/16/51 No.597

BALANCE OF PAYMENTS ON CURRENT ACCOUNT (MILLIONS OF U.S. DOLLARS)

1948

RECEIPTS

PAYMENTS

1949

RECEIPTS

PAYMENTS

1950

RECEIPTS

PAYMENTS

1951

RECEIPTS

PAYMENTS

1952

RECEIPTS

PAYMENTS

o 10 !

GOLD AND FOREIGN EXCHANGE ASSETS (MILLIONS OF U. S. DOLLARS)

20 30

PARAGUAY

40

OTHE.R INVISIBLES

(NET)

INVESTMENT INCOME

25 ~~~~~~~~MO~~~~~~~~~~~~~ END OF PERIOD

20r--------1

1 5 f-----------'

D J D

1 0P.-:\ ..... ;;:;----,r;-----1 ::':'::FOREiGN'~<':'::::::': '::":;::l~: ... ;:iX;"EXCHANGE')':.:·:/·:

5 .::.;: ... :; .... ::.:.:.::.: .. :.:: .. : .. : .. : .. ::.:::: .. : .... :: ... :: .. :::.:.:: ... :: .. :: .. :: .. ::: ... : ........... ::: ... ::.:: .... :;:::: ... ::::: ... ::.:.~.: ... ~.:.." .. : : .::.:;-: .:.: ::. ::s ~ ASS E T S ' .. :.:::': ::: GOLD, I ~[11~f/~~~JJ.f.~W.n~/.\i: f~(u{t{itl~}i~~~ltg ):(j~{/XWl!f)(?: o ~~~~---L~ ~

'46 '48 '50 '52 D J 0 J 0 J

1949 1950 1951 1952 I.B.R.O. -Economic Dept.

25

20

15

10

5

0

REVENUES AND EXPENDITURES (MILLIONS OF GUARANIES)

PARAGUAY

120 ~----~------~----~------~------~-----r------.------.'20 YEARLY I I I I I I I

100~--------------------------------------------------~100

80, "@( 80

601~. -\-XP-E-N-O-lru-R-E-S------------~~--~~~~j~~--~10~------------~60

40 . ...1 RlEVENUES ~ :::: ·!:?:;"----f'v"..~:··:·:!:·1----J.X.X1;.·/.i.~.l.r--------------l40 , :::.:.: ..... ::. :::::::~:. i~ .::.:. ~W~---Iw'V ...... ;~}··t----I~(.·.i.l.· .. ;.;.: .. ~,--LA..AA{t~1t .:.;:;.: /t~J-------------l20 ::::-:$ I .)~ I ;':::. 1 t~{ I ::'.:.::" I I ILl .1 I I 0 o

20

1945 1946 1947 1948 1949 1950 1951 1952

MONEY SUPPLY AND COST OF LIVING {INDEX, 1940= 100}

2000 r---.---,...---,.--,..---,,.----, ~~~~~~~~~~~~~/~~~~~~~~2000 YEARLY

1 5001------1'-----1

1000r-----~----~ , , I

500r-~--~----~

MONTHLY / ,/N.A.

1------~~~----=--=1----------1--------~1500

r-------=-~--------~~'~~=~~-----~r-------~IOOO ,. ....... .,.--'

,. ..... 'COST OF LIVING {ASUNCION)i ~_~-=,~_~_~~=+--------~----------1--------~500

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I' /16/51 No. 598

'46 '48 '50 '52 0 J 0 J 0 J 0 J 0 1949 1950 1951 1952

I.B.R.O. - Economic Dept.

CONTENTS .

SUEl-IARY AliD CQ!.TOLUSIOlJS • •

1. 11lli fARAGUAYAlJ ECONOHY

a. b. c. d.

Land and People • Risto:!:",;}; and Polit1.cS Out:?ut and Income • Production and Trade

2. AGRIC1Z.TURE

a. Basic Data. b. Current 81 tuation •

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c. Agricul tural Credi.t •

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d. Principal Aspects of Agric·JJ.tttral Policy

:3 • INTErmAL inJAECE

a. Inflation. b. Gover~~ent Budget • c. Bank Credit •

a. b. c.

Foreign Debt and Investment. '., Foreign Trade and Exchange Posi t1_on Exchange Rates and Practices

5. CHEDII'l 'ORTEIl1ESS . . .

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4 5 6 6

9 10 12

13 16 17

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SUH:HARY MID CONC1USIOFS

Par<!.guay, land-locked bet1':een Argentina, Brc>.zil and Ealivie, is di-by the Pa1'a""'..lav River into t":o distinct nC1tur~'l rerdons. Tho Dart

e:st of the rivo1'\s' suitable for Dgriculture, thou0'h he2.vily forested; 7 ~c· 0.(.' +he 1 ., 1 I. ;...;, 1; on '"'oDula-'-l' 0'1 11-V8 h,"'rr. "ithin " h'-''''c"1'ed-n\i 1 '" :,)/-J .l. Us. .4.-__ 4 ~u,.:.,...:... ...... ~J ~ (. V ,;, '-" '-, . • ",.!.', ... :..t._.l..t. .• -"'" .

raciu8 of Asuncion, the caoi tal. T~le other retio!'!, the Chaco, is sDarsely ~opulat8d and especially adapted for cattle r2').81n;;0 Petro18Um 8x'010ratibns \':8re c['rried out the Chaco re<:;ion by the Union Oil Company of Califomia for many yeDrs Hithout Sllccess.

Demogra~hlcaJly , South America. Thoy ~rc are rather efficient personal dealings.

the 'Para?uayan people are the most homogenous in quick to loC'rn even complicr.tod mechtcnical processes, fa:i.rl:r energet:Lc y;orkers and very honest in thelr

Poli ti.ce.Uy, Paraguay's history has been characteri zed by chronic instability. The present Government C8Jtle into I'rovisiona1 pOT:Jer in AUGust 1949 after a ma.jor c1.vil :'1ar in 1947 and subs8~uent inter-J)flTty palace coups dletat.. The incurr:bent narty, the Colorado , appears to enjoy large popular support and the political si tU.a tioD is at, nresent relat:i.vely stable.

ParClguay basically a food and .!'8'V! m2terial exporting countr:'T crith over 60;~ of its '1rorkin~ popu12tion engaR,ec. in agriculture, cattle rai8L1>; cmd lur,l~Jering. Lurr.::'er, cotton fiber, quebracho extract, hides ?Dd meat :.Jro-ducts EJm.al1:r 8CCo1,mt oyer 801: of btal exports. Incustry comprises tile::Jrocessing of food products, forest products, hides, vegetal;le oils, sinple construction rr;aterials and. textiles. Lack of central "rater sup"::ly and inadequate electric po"er in the> /'suncion area, 't'lhere most industries are located, are factors militating against induGtr:i.a.l exnansi011. ~lectric p:','Jer ca:?acit;r is at 'cresent being expmded by 10,000 b" ';:.,ich 1J.Ul1 ::nore t.:cc'!1 douhl::: tl1e '?resent sClp:;ly of electric pm:er.

Governme:1t activities to ~romote ,?griculture have until recently been ver:;- li;;;i tc(l, m:::i:1ly beef( U!;h3 i;1;;ldequ ate funds 1-Jere provided. Oove1'n­l"lent pr:i.ce regula:~:l.':l!lS 1)ro'1ic1o little inc(~ntive for farmers to increase outout. P~'ice r,3p:ulac,ions are apparently the 1a:i '1 cause of decline in the me at i nc1us try , the rise of cattle prices beine; s 1m·! cOnlDC'.red 'With the rapid idcrersG in costs of production and of living. Action to improve agricul­tural development has i:1cluded: (1) expansion of agri'oultural education. and extension Services, mainl~;, 1.n.th the aid of a USe 350,000 grant from Point IV funds~ (2) clarification of the land tenure situation by giving lIequatters" legal title to their farms; (3) increased imports of equip­ment (tools and anirnal-dra1,m implements, tractors and attachments, barbed and plain Hire), fertil.tzers, insectici.des and veteri!lary products; and

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(4) provisions for more credit f<>cilities for the ~cquisition of equipment and requisites.

The Institute of Inter-American Affairs has established "servicios" in Ac;ricultu.re (STICA), educatj.on (SeIDE) and hea.lth (SelSP), w;_th percep­tible results since 1942. In December 1950, Paraguay end the United states si.g-ned an agreement on technical cooperation and a Joint Economic Commission Hf'.8 establi~hed. No overall development progra.m is expected from the Conu,)j.ssion. So far, the U.s. has suprylied the i'ollo-viing technicians: one on t:-ansportation, three on the fiscal system a;·lo one onihdustrial vegetable oils. The work of the Point IV technicians and of the three "servicl-os" are coordin~tted by t:1e Chief of :rUssion of the IIAA, '!rlho is also one of the U.S. rEp resentati ves of the x,Iixed Commission, the other being the U.S. Ambassador in Par<.>.guay.

The inflationarj' situatiol1 in ParaC'.lay is serious, and 1dl1 be diffi­cult to halt. The Goverl"'J:1er.t is eOrEcious of the nroblern and is mC\king ef­forts to stop those :i.nflat.ionary forces ~"hich are or could b8 undel' its con­trol, such as budgetary defict ts and cred:!.t 9xpansL on. To this end, reor­gcmization plans of the f:L2cal and banking ~:p"st,=ms 1:1hich 8.re being carried 01.1.t vn th tho aid of foreign techn:i.c~.ans should greatly help in balandng tIle budget and in the formulation a'ld implementation of an cp propriate monetf'F! and exchange policy.

The balance of payments prospects of Parag':tay appear to be good. There exist possi.:.jili ties for expansion 01' export volumes emd, unless o::fset b:r a ge'1eral cmd substantial decli'1e in ""TO rId p:c:Lces, export values should average more tha.:l the 19LIS-SO average of ar: eq:Jj.valent of US# 30 million (official i~eceipts of exchanc:e). '!Jhile total imports "tonI1 prabt.bly increase, both in volume and value, there ~.re many opportunities for substitution of present i~.uports by local manufactures, such as textiles. No great inf':Lmv of ne1·J foreign direct tuvestment in Parfl.T .. lay eX'pect.ed for the next fe~v years. Same repatriation of private Paraguayan funds held abroad is, hOKewer, possi­ble if political stability continues.

The ext,ernal debt amounted to the equiv0.lent of US~'~ 16.57 million as of October 1951. Of this amount about 2g%, or US~ 4.65 million, is payable in u.s. dollars and the remainder on the equiva.lent 0; US~i 10.3 mIllion in cl'uz~iros, vst ; 0.95 million in Argentine nesos, ~md usr 0.64 million j.n ster­ling. All loans are fully disbursed and only the Ster1ing Debt is renresented by publicly held bonds ~ The history of Paragua:'an forei~n debt has been complicated by defau~ts and transfer difficulties. On its present outstand­inc debt, hC/Hever, Pr,rac;ua;/ is up to date ex~ept in relation to f':n intor-Gov(.rmno::,:bl cruzeiro d ;ht~ UT)0!1 ~ tr~n::;fcr 1]~YTIQnts r~re in :"rro!'rD since 1947, but ,?rr1".nl'·~r:~cnts ~l~0 1'101'J being !legot~ .. ~.tcd.

from the above computation 'trould, according to contract, have averaged the equivalent 01 US~ 637,000 annually for the ~eribd 1952-56. It is not possible to knO't~ at present whet!1er the negotiations nOu-7 under t-J~.y 1rrill n.ffect this schedule nor hOH the ex:lsting arrea::os of transfer "rill be sett:"ed.

The balance of payments position, the present ratio of debt ser­vice charges "(.0 exchange receipts and the ra]iid amortization of indebted­ness no':·! outstq'1ding all indicate that Pa;::'agua.y could assum3 some I:tddi­t:.om.G. serlice charges from 1954 to 1956 and !Je:..~haj)s still ::nora from 1957 on. Ho~:ever, until 1957 Hhen f:>reign debt service (including dollar ser­vices) declines sharply, it would be desirable to minimize additional ser­vice charges, applying reduced amortization schedules in that 'Period. Otd.ng to the make-up of currencies earned by eX!'orts, Paraguay's credi t1rJort~-liness in U.S. dollars is r£';ther tight. Risk ~vould be reduced if lending vIere partly in dollars rnd partly in other currencies, such as sterling.

As long as the present budgetaIj" and inflatibna.ry situation does not in:")l"ove subst£1nti8.11y" any lerding to faragu&y should be for pro jects requiring the least possibJ.e Rffio'J.nt of budgetary funds. The availa bili ty of non-inflationary funds for developmental purposes ;rill larr::ely de:?end upon the effective irrmlementation of measures being vJOrl:ed out by fiscal technicians of the U.S. Point IV program.

... iii

1. THE PARAGUAY A!,! ECONCi·1Y

Paraguay, !and-lock~a between Argentina, Brazil and Bolivia, has ac­cess to the sea by Ha;t of abou.t 9JO miles of 'tfaterv;ays control::'ed by Argen­~~na. Its geograp~ical position explains the frictions which at cne time or a:r.othel' have existed ·oetwoen Paragt.~,ay and its neighboring countries. Inland lccation also lir.~ts her free aCCesS to intern~tional markets and retards the arrival of political, economic and social ideas from the outside v-Torld.

The country is divided by the Paraguay River into t1ITO distinct natural regions. The part east of the river is suitable for agriculture and is h~avily forested. The other rer;ion, koo~~'l'l as the C11aco, is espe­cially adapted for cattle raising. Petro1e~~ explorations were carried out in the Chaco by the Union Oil Company of California for w.any years 1>]i thout success.

Demographi-:;al1y, the Paragt~,ayan people are O:le of the most homogen­eous of South JuneYica. They are descendants of the Spanish conq!erors and indigenous Guarani Indians. They are quick to learn even complicated mechani­cal processes, elre rather efficient ar.d fai rly energetic vlOrkers and vor.! tonest in their pe::-sonal dealines.

The populatiOn is estimated Detl-Teen 1.2 and 1.4 million, about 75% of "Ihom live wi thin a hundred-mile rac'ius of AS"J.ncion, the capital. Asuncion has a population of about 200,000.

b. Histo~ and Politics .........- -

During t,he colonial period Para:;uay was a Jesuit, E:.ssion ~ 8 ,Q \.'/r' COJ.ony. Independence from Spain was e,;.eclared in 1 11. From 1",14 to IdD::> ,

under the dicta-:'orsbips of Jose Gaspa,r Hodriguez de Francia, Carles Ant,enio Lo")ez and Franc::sco Solano Lopez (called by the Paraguayans !!',rhe Great l'lar­shall"), the country enjo~red more social st1?biJ.i t:,v and economic prosperity than most other Latin Amel'ican cour.tries, thouph at expense of relative isolation from the rest of the world and some stifling of self-express::on.

Xhe vIal' of 1865 .. 70, the "Great l':ar" fought age.inst J.rgentine" Brazil and Urw{c,ay, left t,he countJ:'y in complete catast:,,~op!1e, with tvm-tLirds of the

'populaticn destroyed, its ~vailable economic resou~ces e:,::hausted, and a 1a~ge foreign debt burden. In 1932, after 60 :"ear's of political anarchy, Paraguay "las embroiled in a net'! war (1932-3;:) ~;i th Bolivia over the Chaco area separating the tHO ccuntr:l.es. _IUtl1ough Paragu.ay ivon the v·ar and most of the territory lL~der dispute, it was at a high cost in men and resources .

... 1

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Follo1.Jing the Chaco 'far, a ceries of mili tar~T coups d t etat culm:tnated in the dictatorship of HiS':inio Horinigo (l9'.l.O-I.l.3), under vJhich the coun~~ry er:joJ'ed a certain degree of political stability. The Governr:.ent Has a.Ole to introduce certain basic and badly needed reforms in the banking and exchcmge systems. During this period, and clue mainly to the effects of l':orld 1:ar II, the country maintained e. favorable balance of P!lYments position, foreign a:'d uas received (E:rir:barJ< and Brazilian loans) and most lines of economic activi­t5es received gr~at stimulus -- not enough, however, to offset the effects of tl!.e Great Depression and the Chaco kar. This "eriod of relative ~)rosperjty endec~ in 1947 ~ilen the in~umbent Liberal party revolted against ?lori~1igo- be- ' cause members of the opposition, the Colorado party, "Jere included in his cabinet. The ensuing civil ",rar Has age.in very costly to the country in men and economic rescurces. After the civil 1;,Tar the Liberal pa:::,ty was pros­crijed, lIorinigo Has forced to resign in 19u.8, end after many inter-Colora:J.o part~' frictions ~nd succession of many P::esidents ir: the course of twelve months ~ the inCUl.lbm:t i?resident of the Republic, Dr. Federico Chaves, ca.rr,e into provisional pm·jer in August 19L9. In AugJ.st 1950 he was constitutionally elected President for a five-year term. The general consensus of opinion see;llS to Ldicate that the present resi.fl9 en~oys large popular support. HOl'T""!

eV'3.rJ from time to tLne rumo:::'s circ\J.::1.te Asuncion that a coup d' etat is irrx.linent.;. but the Gover'nment has so far ali-vays controlled the political 6i t1.:a­t,ion.

The Co1)rs::10 ~)arty, llhieh had been out of pa~-Jer since 190)4, is an agrarian party ~18av~ .. ly imb~J.ed HUh state int'Z)rver:tionisrn ideas.. In its de­sire to protect the un:-:er-pr5.vileZ-3d the party h2.S insisted that price con­trols, rationing, e~c., s:1ou::'d accompan:r th:.; strict quanti tq.tive exchl?nge (;ontrol. rr.e~sures enforced for baJ_ance of payments purposes. The adlTlirlistrrt­tio;1 of all these ;neaS1JreS :1ae sometir::es been to tbe detriment of the tra­di tional businesE: community, Fhic:1 does not s-enerally support the present Government, contrar:' to ,·hat had happened under the Liberal regime.

c. Out~ut and Income

The na.tional i'1.co;e of Paraguay Has estimated offiCially at the e(~'-Li.valent of US'· 1;:0 ni1::!,ion in 19h6. The agricul t1.lral (outside of cactle rc~ising~ sector, liTit.h ;;6% of the i\'orking population, accot;.nted :or only 19% of national ineallis. Cattle raising, on t1':e oth'3r hanel, apr:;ears to ;:;19 the nost productive lila jor occuration in Para~ay, accountj.ng for ll t5:, of '1aeo::;(3.l income al thOU?)l err.playinG les2 ttan 0 f the 1::0 rking labor force. Indc).stry and COl:]Lerce contributed 38~; to the national incomG a..'1d occupied 18% of the labor forcE'.

An unofficial national inCOlre estimate for 19h9 ShOl'YS an increase of 203% over the 19u.c figures in terms of gURranies. ~:h~.le it is trIe that pro ... du etion ar.d COFJ-1erCe have recupel'ated from the C!.:isru·otion caused by the civil ~1ar of 1947, and thet most lines 0: production are above the 1946 le~"el, this 203J; increase in income reflects to a -very large extent the price increases and depreciation of the cur:::'enc:;:- during the period.

T:1ere is no ",vail$.ble estime.te of ca:~ital for.~atior1 or enough data upon ~Jhi ch to base one. HOvJever, on the basis of Governnent ca :pital

- 3 -

exp:mdi tures, and on a rough estimate of do:. estic capital o·..ltlays and of Ln­ported capital goods, it seems probable the.t c.omescic e:ross capital form~tion may be at a rate of about 10% of total O'ltput, \,lith most of the investments going into real estate construction partly as a hedge against infl.s.t:Lon.

d. Prcuuction and Trade

Paragiay is basically a raH-material exporting country Hi th over 60% of its Horking population engaged in agriculture, stockraisin g al d lumbe;.'ing. A subSt&\'1 tial percentage of tota] domestic prod'lction is devoteo. to ex.ports. Lumber, quebracho extract, cotton fiber, hides and skins and meat products accounted for over aC% of total exports in 1950.

The m5x.eral resources of Paraguay are reported to be meager. Recent exploration into the C;1aco region cp parently inc.icated that petroleum de­posits cannot b3 profi tabl~.· exploited.

Industry cor:prises the ';l·ocessing of food 1Jroducts, textiles, forest prod'lcts, simple cOT'.struction materials, hides and vegetable oils. Prod"L:.c­tion of leather end .;ood products is crude 81d on a 1 scale. Uith the e;,:ception of Iileat su~a;c, quebracho and tl-:8 textile industry, p!'o­cessins is carried out in small ~lnits. A cement p:'..ant vall begin op3ration a.t tl1e end of this :;rear 1[hen at full cap""dty e:x:r;ected to sat~sfy local dor,land. ::ost Dare . .,.uayan tndnstrial estah:::'ishments are in the Asuncion area and it is e2ti:-,ated J no1':.1@11:' some 7,OeO llorkerl;3 al'e engaged in f,!8nufacturing. l=an:.~ factors mi:::'i tate against industrial. expansion in the Asunci:m area, ti10 la.c~{ of a centraJ. f·m.ter t"upply and inaaequate (': lectric pOVIeI'. tirle e:ectric'~·o'·rer i s being ex-l)anded by te.TC new bci19rs and a n€1tJ generating un:l..t of 10,000 r:or8 than dO"lble rr esent electric Drodcction.

Host of I s foreign trade is conducted t:1rough the Parana-::1iver system, ano. by the ArgeX'.tire r.:erc!'tant fleet" WITch aP?G.rsntJ.y

enjo:rs alJ10st mono-;Jolistic privile>?;es and pract:Lcally dominates the !'rej.f:ht :..'etss. In a,:lditi.on, tively large volume Para~;ua::an ~")roducts :tn relation to their market va1.':\es pl;>ces export ind1.lstries i:1 a scme't<'!hat pre-c<?riO'.ls position the hijh unl t trm sport cost is 1'e1a ti'1ely rigid cc.mpc:.recl Hith inter~iat:::"onal ?rices for e:zno:cts. this si t:1ation, the C07f;;;r:1ffient of Para&,uay created the State in 191~5. S~_nce most of t:1e shi:?s '::lol..:.ght 1..Jere of exc8ssive drau;;:;ht for lm..r-'C;ator level in the ri~.rers, they are at )resent operating at about capacity. None-theless, during 1949, for pr8.ctica1 purpGses its year of full oy.:ere.-tion, the State Herchant carried around 6% of total international trade traffic of the country. The estjmate for 1950 has been placed in the neis:hborhood of 10%. the a::lministra:~ion of the State 1lerchant Fleet

reported to be somewhat inefficient, ti:e ach:al operation of trie ships seO:'lS to be :catlv;r good. In fact, the State Ilerchant Fleet has been operat .. ing Argent!ne ships to the f'ar26uayan Government. An important co~-tribution of the state Fleet "Tas the tra:1sportation of ga~oline and oth81~ Gssential im::)orts avoiding a critical duri the strilce of stevedores in the ?ort of Aires last 3'ear. Furthermore, many Para ... guayan exports are carried the national fleet at lOHer rabs.

... 4 ..

The on1y important puhlic rsibray line in Parar;uay runs L,60 km from Asuncion to Encarnacion, H1";ere i t l~nl{s up wi th a. line to Buenos Aires. The preser.t highway system consists of about 520 km of paved roads and 460 km of other roads. As a '!hole, present transport fa.cDi ties are inadeqw::.te for t>e ordina:::-y::,eq'.urements of the ccuntry, n:ck transport costs compa.rativ81y m_ ':'ra:1Sportation in general is no~·J being stl~died by a Point rJ tec~mi­ci:m, aile'. it ie e::pected that his report, due in a.lJout months, Hill :tr:.­dicate the priorities between different means of transportation and recom­r;;eLd appr'opriate action.

The export trade of Parar,uay is to a large extGnt dominater: b~:" A1~gentina, especially lunlber, quebracho, meat mel cotton. All exports re­quire licenses frem tho Ba:rJ< of Paraguay and also a f'Jrrnal obligation tal:en by the e::porter to return a specified amount of exchange. In this Kay, even though a large percentage of Paraguayan exports go "in transit" through Arg::mtina, the mone:'ary 2'.thori ties of ParaS''Jay are ai)le to determine the a"i.ount and Id:1d of foraign exchmge to be returned to tile country.

I~1 tr:,o instances, :-!.umcer and cotton, there are com'91aints about the disadvantas:es suffered by :FJaragu&.~r in its trade tion vis-a.-vis Argentina .•

tl:.e case of lumber, an 8xport.;;;l's com-?lain -cleat due to the in.:. al)ili ty or umi llingness of the authorities to grant them foreign 8XCr::n ge, they h3:iTC bee~l unable evo install €l1ou~~h savimills to e::c.ort sa~m lurilber, Hh:_ch 1i!Oule::. save on traY'.C'Jort costs ane. gain th":'l proftts of nrocessing. Also, Argentine re:;ulations ar~d taxes are forcing Paraguay to export lumber in logs to be processed in P,rger~tina, part of vJhich returns to ParaguCiY in ti1e form of f5.nished '{eJOoo. prcc:ucts. In the case of cotton, t:1e Parasl:.ayans feel that

should establish a. cotton rre3sin~ pJant 1:1 l~.Sl1P..cion to reduce the bal~s to norm21 corm:.1ercial s::'zes for eJ:port pur?oses. A:.:ruost all of ra.r[l.~uayan cotton at tIle presen· time ha2 to come to AS'.'..'1c:,on ,;,:hence it is ship::;ed do~m the ri":er to ArgeLtj.l::a for gradtLg a1 d press:'ag. The Pa:l:'aguayans ha-'Je esti­mated that having t:leir cotton cOl::.,1"essed in Argent.ina costs on annual average l~;: million Ar$entine pesos (US~ 200,000 equivalent).

On the whole, there is no cp. estion that Argentina. exerts a large in­fluence on Para::uayan international trade and. on the rest of the economy, ooth thr:::>ug:1. the coyr,')licated Argentine e::chmge s::stem liable to change at a.'1Y time un~\-lat6ral action, a:1o. throt::.gh the advantageous posi ticn of carriers of P2.ra:;ua:"an. e::yor-!;,s and in::!Jorts. But up until nOi'! t>aragu3",f hr's usually been able to negotia-::'e m-Jay most of the difficulties arising from the sit'lation and to avoid international complications in this respect.

2. AGR! CU1T1r:E ];/

a. Basic Data

1/ ..-

,

Practically all of Paraguay's lCO"OOO farmers are in the Eas.l;;ern

This Chapter '{eras ,'IlTi tten by l'lr. D01~vJe Oroenveld. !lore detailed :--eports on a.griculture ar;c;l agricultural cr6di t in Paraguay' 'Nill be available in the Economic Department.

.... ·5 ...

p9rt of the countrJ '!I<Jhere they OCCU!J~T 1,653,000 hectares or one ... tenth of t:!1e available 16 mill:ton hectares of land. Of this only 360,000 hectares are 'lTI­

der crop every year.

Appro:dma tely four-fifths of the rura::!. population Ih-es east of Asunclon ~':i thin a half circle with a radius of 100 km, md in an area some Lo km along the central railroad. The rest of Last Paraguay is very sparse~"y populated '!I<Ji th agriculture conce:1trated in colonies, most of l':hich ;"~el'e eS '::.c1')lishad after l,!orld tolar I.

In th~ a{;ricu1turally important areas roost of the soils are red sandy or clay 10a.i1S Of fair to poor physical quality. Under proper manage­ment the;T can siva satisfactory crops but they are nO~'T 'vorn out by century-­long prinitive cUltivation. Thou,,;h pr0cipitation in these areas is suffi­cient (1200-11300 Ir ... ll a year), mos t of the rain falls in such heavy shol-rers that in some re"lions water storage facilities should be built.

The larp';est !Sroup of far!'flers ~'Iorks mixed farT.ls divided into some arable l~nd (corn, mC1nioc, cotton and sugar being -:,he most important crops); grazing lanel for a pair of oxen, a :ew COt'ls, and a horse; and some W'aste land. There are few' farm la1:)orers (peon:;:;) but ll:CSt 01 the ;.mrk is done by the famer and his family. These farmers heve practieall:r no knOi:Tledge of modern l'lethods, their eql).tpment is ver-:-;, and o'.:>solete, and their hold-

are so sraall (tuo-thirds have less t):an 7.5 hectares) that th3y seldom are considered a .r:ood for a banl~ loan. This a pplies especia1l~T to the t1';O ,..thir(~s ::ho have no ti tIe to land, an( are considered "squatters. II This unstable tuation hi n.d.ers farm inl'Jrmrement.

'Iho second group consists of 30;::e 1,100 cattlemen vD. th fl.~om 250 up to more than 20,000 head of c8.ttJ.e. They live either in the Chs.co or in the pam?as north of Asuneio!:, or in th southeast at some dista:1ce from the rr.il-road. are ~malthier than the nero'oers of the first group and the best have some lmo~Jledge of modern breeding (;,,::1d vete:cinary practices; can rea.dily obtai:'1 cradi t from the Agricultural Department of the Banco del

Thirdly, there are those farmers Hho settled in the three decades in colon;~es in r-smote areao, 11'0 i"Jere either Para::;:"J.?Ycl.n f?rners 1:Jho J.eft the Central Zone -' or immisrants ,Tho left :':'ur0tJe since TTor::'.d . 'ar I.

hold:.ngs are usuall~" fro!:: 20 to 70 or more hocb:res. The main ;:::,rob­l(~m O~. tl1ese colonists is ho~. to clea,r ne~·r lar.c1. and hOH to tre.nsport the pro­,.:c:,cts to:1arkets.

Of the 360,000 h,")ctares under cultivation in 1950 .. 51, more than tlrTO­thirds iv-ere devoted to cix maj.n Cl'O,,)S (corn, 103,00e hectares; mandioca or Cassava, 61,OCO hectares; coteon, 58,000 hectares; su.ear cane, 17,DOO hec­tares ;'Jea~1uts, 13, 5eo hectares; and cm'T!)eas, 20, tJOO hecteres). Rice and tobacco are of SOY'le importance. In the southeast much attention is paid to yerba and tu.ng oil nroduction.

The stock of farm mimals consists of 3.4 rnillion head of cattle (against. 4 mllioll ten :tears a::;o), 27~,COO horses, 200,COO shee!), 350,000 sHine, and a number of donkeys, mules and poultry_

Agrj.culture ;JI'oduced for export in 1950-51 included some 11,000 tons of cotton Uter, 5,000 tons of vegetable oil, 4,000 tons of tobacco 2.Y1d 3, GOO to;lS of 7erba mate leaves. Other important e~ort prodl'lcts are logs c'::--.d l1;;,rJber (21.t:;, 000 tons) and qU'3bracho extract (42,000 tons) _ HorC) than i-a::":!:' o:~ exported meat (13,000 tons) came from cattle ir.:.ported into

from the mrthern part t:1e Argentine.

c. Agricultural Credit

There are tr{o agoncies for agricultural credit in ParaGuay:

(1) The Agricultural De?artment of t:le BarJ;;: of Paragu.ay, and (2) T!1e Credito Agricola de Haoill tacion, or CP.H, since 1950

also a deperlder.~y of the Bank of Paraguay.

The first makes ordinary loans mainly to cattle ranchers. In 1950 t ' ... .... t 1~' rI ':) r:' • ., 1 . ( :; 1 7 ' 11' ) .t:' 1-," rI 6 .., gran eo ne1'J .,;.oans 1.10 a .L:: .. ng 'P () .. ;; f.'!~.L_l.on 0. .... _ r:1l lon 0.1. ·h;~C.h 'P .. ..;-

"... ( .... , 05 ""') 't-l-l " .... ., t' t·, t . nU_.L10n ;;p_.. ml...1...J..lon ,'Jere <:'0 ca 'J_eJ:len. ;coug"..LY 1-JJ.ce ;1].8 amoun 1.5

nO~J outstm ding.

The CAt! is a. sU'o'3rvised credit cV3cmcy, ano ~:orks mainly amo;1~ the slY!all farners in t:ce Central Zones and in t:12 colonies estD.~)lish(~d by CAH

t:le outer nrovir.ces. It has sa far :-:ade loam to 7,000 fanners, on a 6% bas~s anr: llD.'" 1-;sb"rc:eo' rI. "1 1 m"'1l~{"'lY'\ ("'] q ""'.~1'-iO'1) of' T'Tl'-':,~h rI 7 m'!"l-'ion ..L., . ..l. "" u.... v. "" . y:: ..1.. . • Ll • .1. ___ .. ~.. "" ••. ''' •. J...~..1.._.' , .... , " ..... ~. 'P _,w....1...l..

($1.17 nillion) has been re:'aic1 • CAE has al<3o l::?J:le loans of ¢ 8.4 million ($1.6 million) to the nembers of tlJO colonies t,nd to CO"te;r the establish.'nent and admin:l.strative costs of these col.onios, uhich are located in Pirarsta 2nd Fisiones. They "mre organized 1r:i. th assistance of STICA, ar~dform good

of ,'!That can be accomplished in Parag.:tay i,rhen ~ood technical and or­ganizational <?dvice is obtained. tJearly half of CAB's credits are in one­year crop l01ms, and 1+5% are five-year loans for the purchase of implements. The opere+,il1g costs of' this ager:cy are high (rj 1.9 m:tllion, or I~O_32 million, :tn 1950) becaus"3 it aJ.so peri'on:m educative and social serviceE. It super­,:1ses ::' ts debtors Dnd teaches them h:nl to l"\.ln trair farms and their house-11010.8. Tuo-thil'ds of the sala:.:-.:r 'Oill is for these services.

The central administ:;.~ation of CAE is not at nrenent in ~ood order but should improve ·t-rhen pen0in~ l'eor~anj.zation plans are realized. .1.ccording to these ;JIans CAR ,rill be .en ind'3pende:ri;, agency; pro'\risions have been mGde to enlarge its funds and to cover costs of adrninistration from Government revent;l.es. Equip:r:.ent Hill be provided to bring bookkeeping methods up to date.

d. Principal Aspects of Agric'1.l1turC?1 Policy • 4, i , I.; \

(1) Agricultural Education.-- The center of the agricultural educa­tional system isa' school located· near Asuncion. The buildings provide

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living and tra1.ning facilities for 2$0 students ·Hho follol-J a six-year pro­gr8U. During the civil vJar of 1947 the equipment of the school 'Has looted and has not been :\.~epla.ced. There are five re~ioDal schools in add~_til')n to this central school. The present ''Judget of this Vinole system is only the e1ut'lalel1t of t;?140, 000 a year.

The recent agreement betvreen the Govenment a.'1d the U.S. Institute of Int.er-American Affairs (IIl'.A) proviciing for the establishment of a Coc:cdinated Institute for Ldueation, Nhien l-I.rill give ac.vanced training for rt'.ral teachers, public health officers and agricl:ltural e]~tension _ce:cs, S~10UlCi greatl:.r aid a~ric;;.ltural ::.ml)X'Ovl:;lment in Parasuay. A sum of US, 350,000 is to be reade available from Point IV funds for the equipment of this rnstiy~te and for :part of its operating costs in the first feH years. The Institute i'Iill be located in inp:;.~oved and enl<:'rged buildings of t~le Agr5_cultura,1 School.

(2) Extr:::ntion Serv~.ce • ... - ~:'hen in 1942 the need ':Jas felt for eX?an­sion of a:;r:i.c1).!tul'al" rrNfuction, an asreer;len~ vJaS sigi.1ed betirreon the Ooyern-:,1ent a~d t!:e about the est.atli5hr1eLt of a jointly operated extGnsion senr5_ce, t:.1e 'I'ec'1ico Interam8ricano de Coor:.eracion Agricola (ST::CA). In the beginning most of the costs v'Jere paid by IIAA but nm', the Government pays appro:dmate;l:,r thre'3 ... qua:rters of STIef'. t s expenses. S'IICA established a rTational Institute of Agronomy ~Jhieh serves as a training center and ::J.S an experimental farm. STICA also oper&.tes a 27,OeO-acre raach Hhere demonstra­ti.on13 in breeding and manaGement are given. Near ASUncion a model dairy farm is used to demonstrate :r:lodern fOGciing and dair;:.- practices. STICA ex ... ;lerts al so perform pioneer research Nork; the~r helped org<'Ulize 51.1,)er-vised credit system (CAl-r), and assiE:ted in the c.esi.gn of grain silcs ;'Jhich are built and operated by the Cor:mercial DeDartr1ent 0-: the of Paraguay.

After eight geod start:7.ng point ing the country.

of operation this joint undertaking 1101.". forms a the establishment of a real extension service cover-

(3) Improvement of Land Tenure Situation • ... - In 1936 a 1a1-' on agrarian reform ifas passed 'DX'oviding for the redistribution of 5 million aores. In 1940 a Department of Land. and Colonization, noer the InsM tute for Has established to redictribute large est~tGs~ to nrorr;otc colonizrtion <'rK~ and to nrotect for2sts. The ~~orl: of th1s to th.8 flsquattersll legol titles to tl'eir fe.IT,s i:: ver~: vnluable, as thic . ro ther., to imnrove t~1eir If'rKL, ",nd Hill make it o<;"sier fot' th0Jl t.o o::;tain COlTJi;ercjnl lo!cms .i:-Jor~: in colon:Lzation end tio:!. !,rove. fl.

'cult'lre coo:-·(

V~~'S:.ucc8ssful, but it is 1101';0:::: t'lc.t it im-1~ot· .. ccn this IEsti t'J.te, C.'~E, i~inistr:.r of' II.

::'r['L'l~~, "nd tl10 Gavsrn;-oc:nt is ~lanning to crc2te a at, th2 tcchnic..:;l 10v'~1 c.'i th re,rcsentatives of the

, 'TIC;\. and CAR.

(4) Improvement of the Equipment of the Farms. ,..- itJhen in the early years of Hartel vIar II the need fbr· agrieultural eXpansion was felt and STICA

established, the Government decided tha.t a prograIll of government-s:;onscrod distribution of equipment, cor.:bined lrJi+h a. nrogram of su:;er"J'ised cre·jit, l-rould hrQrove this situation. Consequently, CAB: was orgmized er,d t1:le im­port and distribution of equipment vJas concentrated in a di\dsion of the ·:-("',r~·lt:J·(' :: Eric1 " +'IT'l_l of lrhicl: l-stGl~ bGccr::~e ~tb.e C02r:r:er-;~;.al ~0e:~~°rtme~~~i~ the Bank of Paragut;W. It vias, hm'lever, not until 1943 before a large purchase of iml)orted equipr:'leI1t c('Iulcl 0'3 made. Since then it has been considered that the bal?nce of 1')fflments cositioCl did not ;"dequate imports. Foreign exchange eXi)sndi tures for farm equipment war'e .3.3<3 rnillion in 19h8, -::618,000 in 19h9 and· 586,000 in 1950.

As many :armers "liho in'90rtecl reC]11isites 1r1 thout ten: (CAE) l-Joulc1. ne ed to be

r,3-equipment do not have enough , t,be funds of the su ;)€'r'.J'ised to secure a v;ir:!.e distrPlution

recluisi tes. T~~.is, moreover, IUSO makes ")oss:':.ble advisory service to farmers on 11m, to us e such r-:;quisi tes mcs t advantae;eously.

It is in:enc;ed to IS capital to r) 40 million thin a few years. Loans to ag:ricult:.:cre (as die:tinct fr0m cattle raising) are nOVl ~bout o 15 million, so t!'1at increas'::o may :ead to a of outstandi~1g credits. ;,J111, hOT,r8ver, have little infla-tiOTI8ry influence as it quick increase of production.

(5) Proceesirg InQustries. - .. The po:.: it:ion of ag:;:-ic1)lh:ral producers can be strength,Jr.ied, the foreign exc:1ar:ge position im""roved and the transi')ort 5i tuation eased :Lf T.:0re m<::lQe in processini~ industries (cotton spinning mills, oil 1Jressiw~ , hide processing plants, etc., and in the case of forestry, more sa,.;:mills 1,"00d nrocessing industries).

(6) Price Policy. -- As a ccnsequence o.f tt.e steep rise in in the last fmJyears t~inimum prices f,'<la}.'antee(i b:7 th8 Governnent prov::"de little jncentive to farmers. Heat prj,ce re"Y,ulation is apparently the main c,nse of decl:l18 in t;:1:1s industry, the rise of cattle Dl"ices being pared. 1c;ith the rapid increase costs 0;': p:::oduction ani of living. ccuragement to tl18 cattle 5.ndustr:." is esper.ially im'r)ortan.t in of the s~lspensiorJ. oi' cattle exports P.rgent2,nH, as a consequel1ce of l!l'l~.ch

~~he meat Dac1dn:! nlants ~!Jere out this vear. The 101:'8 of meat rep1'8ser:t; a'bout U3 3 to 4 !!lillian gross ana US'" 2 to 3 rrHliDn cattJ.e irrroorts used to about 1 million. Due to the price pre-sently folloc-Jcd by Goverm:en-c has bee~1 est-L.·,i3.ted that about 80,COO head of cattle are smugq-led into c~uld be ~ro:it~bly used by ti18 ffieat ·':'.c::ing plants.

(7) Location of Action. -­e:Qar:d agricultural production in the rail!'oB.cl. ProducerG in T1hich COrL."16ct 1'li th

apryear to be good opportu.':.i to Central Zone and alongside the central hays fairly ?,ood trmsDort faciliti8s

hand the dev910pment of mors distant regions, migration, ldll be successful only when large building of roads.

or cor;sl)Jrrot.ior.. On the other cmnb:5.118d y·n th lar ge-scale im­jmr8stments are made in the

3. INTEUNAL FINANCE

a..' Inflation -,-I:iQney supply increased steadily from ~ 12.7 I!'I.illion at the end of

1939 to r; 229.5 million at the e:1d I)f 1950. The cost-of-living index in Asunc:,o:l averaged 872 (1939 eqvals 100) in 1950. Up to the end of the war, bala.:lce of pa;;rruents surpluses were mainly responsible for eXpchlsion in rr:':lney s~pp1y, but from then on throul'.'")1 19Lf 9" internal :actors 1I-Jere res;~o,1sil,)le for an accelerated increase in spite of a.eclining i.!1ternCltional reserves. The expansion of ruone;:r supply in 1946 and 1947, of about 9)~ and 7% respectively, "tvG.S rather mcderate, but in 1748 and 19h9 the rat,e of increase was '..rery high, or abollt 50;/ per year. During 1950 theincreese vias also close to 50S;, but in this year external factors (i.e. a large tract,s S:.lrpJ.US) also contributed to tlle increase. l~eanwhile the cost-of-living i'."_dex kept pace ~dth the 50% increase in mor:'3Y supply ourinG' each of the last three years. I~formation on 1Jages ino.icates that they l18V3 12.:;:;0d beh ~nd nrices, in snite of sub­st<.ntial 1rJage increases decreed b:,rt.he Governrnent d\1I'ic'1g the last ti'O years.

Durj the fj.rst six months of 195"1, Doney ;;,upply increased by a further 307" to rt 293.1 million, tte cost-of-1ivi::1g index lagging b3hi'!:lCl ,dth only a 16% increase. H,),.,8V'er, dllrj,:1g July the Gov9rnment decreed. a general incre/itse in I,rages and salaries, and in August official price increases were granted in such basic foods as beef> l:>akery products, ~rerba mate "n d nork, all of ',hieh \\iill be reflected in t.t13 cost-of ... 1ivinz il'ldex in forthcoming months.

The above data clearl~T i:'1dicate that the in:f1atioY12ry s:;.tuation in Parar,;uay is serioL1S. The GovernrnGnt is c,:mscio·J.s of the nroblem and is 1:1aK­iug efforts to stop those infle.ticnary forces \·h:l.C~1 8re or could be uncler its corr~rol" such as budgetary defid_ts and credit expmsion. !{Ot'Y'~ver, there are certain other factors tl:at affect the cost s~ructure of the country and put pressure on prices. For instance, t:,e depe:!dence on Argentine ships for river t:ransportatio:1 e:;:erts considerable influence on :;;rices of imr~orted g':)ctis. Recently Argentine fr,;3ight rates 'Jers incrGased 30~, with a further 20r; s\).!'charge in uF .. r:!..ver freights. This :inf~.11enCe acdi tional to that produced b;;r the general increase in ,:orld commodity ryrices. Also important in the inflationary ::.:.icture are tl'.G effects of the gro~rth of exchange hold­inGS and of the practices f'ollo'i;ed the exchange system. As is e:xplained in more detail beloH, curi~lg 1950 a"'\(l part of 1951 (untj.I larch 5, 1951 when currency vIao devalued and the exch;nge system revised), the bf'lance of "9ayr:Gnts vras exerting a double in::':'latic'1ar: r ~res"ur8 on the economy due to an uarealistic exchange policy. On t~'"2e C"J6 hend, the nonetary ru thori­ties in thc:;ir desire to scarce forei;:;n exchange restricted imports to almost b2re necessities Hith the result that the bal2!lCe of ments i1ClS

closed ~d th a s'J!'plus of 7.2 million. Hovr0yer, the price of this in-crease in international assets "::a8 a lack of adequa.te imoort stocks through­O,lt tLc cou.n-l:ry af.ld R;:;:;:Js are noticeable alJ. around on retai lers' shelves. On the other hand the increas,~ in inter"lstional :::'esorves caused 8Xi)alsion of tr:e mone7 sup-I;)" both directl:.' t,hro"...l~h the'Inflo1rT of exc:lange and addi­tiona Uy and indirectly because the i3art'k of Para.r:~uay in acquirine this

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e;:change 1{as simultaneo11s1y subsic:izing both exports arrl imports by pa:'i.ng out guaranies .9.t a higher rate per dollar to exporters than it I,ras charging to importers. The Bank's losses on this exchen ge policy alone were re1;:ponsi­ble for almost 40~; of the increase of the money sup,ly during 1950.

It should be recognized that to stop inflationary pressures is soing to be a verJr difficult and slow ryrocess calling for changes in the adminis­trative system and economic policies of the Gov9rmnent. In partlculal~, a balanced budget, an appropriate moretar.! and exchange policy, and some co­orc.ination behJeen o1'ficial CL"1.d ]1rivate investment 11 be necesS8.''.'Y to halt inflation. To this end, present reorganization nlans of the cal CDC:

banldng s;:,rstems i-rill be of paramount inportanc e.

b. Government B.lldg~t

One of the fundamental ,roblems ,h/i thin the financial sector of the Parag\layan economy is the fiscal system upon the iT:lnrovement of '\f1hich future de'velopment the attainment of moneta~7 stabili t:r will be grea.tly depen­dent. There are currently three techn:l.cians from the U.S. Point IV program attached to the l!linistry of Finance, Who are "Jorking on budgetary management, customs and tariffs and tax revision and collection imDrovement,respectively.

Fiscal administration reflects the historical ard Dolitical insta­bili ty of ParaGUay. Expenditures aJ.locatecl to the l1i:1istry of Interior (police) and liinistry of Defense account normally for more than 45% of ordinary expenc1i tures. JvIilitary service is comnulsory for t~\o Yf;ars for all young men from 16 to 13 years old.

Tax collection is ill-administered. The large turn-over in Govern­ment personnel when a sudden change in Government occurs accounts for inef­ficient administration of the budget as vJell as lack of continuity in poli­cies. The Bureau of Internal Revenue has data shoHing collections but noth­ing indicating the ai110unts due but not collected. A survey has Sh01ill that no tax has been paid since 1949 on over 53Y, of rural holdings; on 34% since 19L5; and on 14% since 1939. Of much greater significance to re'l,renue, hOvT­ever" is the fact that as the a.m::mnt of the tax -- and hence the size of holdine -- increases, the ~rcentage of delinquency rises sharply. Thus on holdings last taxed over 9 100, 63.8;~ are delinquent; on those taxed over ¢ 1,000, 66,4%; and r;. 10,000, 95.4.%. Delinquency 8.I"110ng large landholders is thus more hcfbitual than among the smClll !,)roprietors, and because of the enormous of some holdings in Paraguey, its effect is extremely pro­nounced. If tax collection in the fifteen districts Fhich Here analyzed had been ellforced against t'lrJenty-tT'IO large estates much more t.?x could have been collected thon '!'Jhat 'tJas paid by all the IS, 52:: actual taxpayers combined.

Another u:Gsatisfactory condition is the ;;reat difficulty of making a tax ljayment. A taxpayer from the cOQ1'ltr:;r is forced to come to the capital en d to incur the expenses of the trip and loss of time from his Hark. He must riai t for at least four days, md per~aps more, for the preparation of his bill; he must stand in line for nrolon~ed Deriods in the tax office. There is no question then t the ")ercenta.go of cielinquency a.lllong the I'"<.J.ral proprietors deserves less criticism than the percentage of those ",no pay

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deserves ~plause. All this, houevl?r, aueurs .. ell for what could be col­lected if the method of payment "'Jere made easier. Specific proposals to this end are receiving sympathetic consideration by the Gover~ent.

The revenue system relies hea~1i17 on i:1direct taxation. Taxes on .forei:~ and domestic t:;.~ade amount to abo~t 50% ... 60% of total ordinary reve­nues. A vlide range of taxes and excises on production are anong the internal taxes dl ich run second as a scurce of revenue, representing about 20% of the tot"'l. The bu.siness profit tax and the real estate tax accounted respectively for ~bo'Ut 10;:' and 8% of ordinary revenue for the last three years. Tr.ere is no personal income tax in ParaguG.Y. The present business profit tax 9J plies only to net profits from trade, be.nking, industry a.rd cattle raising. In­heritance ar:.d gift taxes represent a very small fraction of ordinary revenue

tha tax strucb.re as a ;'Jhole is highly regressive.

A detailed app:::-aisal of Government finm CBS is difficult. No clear distinction is made bet,,?een current expendi turss of the G07emment and long­term capital investment; simila:cl;,;", current and "extrf'.ordinary" revenues are used somewhat indiscrin'inately to cover ordir"ar;,r expenditures as uell as capital outlays. The best indica,tion of the ma:;ni tude of overall Government budget deficits is given by the ~nnual chan::;es in the internal public debt. These chmges arri the available date. on actual budget receipts indicate the probable aggregate expenditures made by Goverrullent. Data for 19J.+5 to 1950 are shoi·m in the fo1:owing table;

= "== Estime.ted

Actual Aggregate Changes in Budget Government 1/ Internal

______ ~ ________ -----~R~ev~,~e~n~1.1~e~s~ __________ ~F~J)~:p~e~rl~d~i~t~U!~r~G:-~s-~ ___________ ~PU~b~l~,~~·~c~D~e~b~,t

1945 1946 1947 1ol.'i -,/"+!~~

1947 1950

24.5 36.8 41.7 L.5.6 58.9 84.,

29.4 30.9 54.1 71.5 95.3 89.0

1951-... Jan.-June n.a. n.a.

]/ Excluding e:xpendi tures fr01:'l assi~;ned taxes.

Public 1A!or!CS p~o grariJ. alel economic developMent schemes lfere from 1940 to 1)'u7 almost :j nanced by foreign loans, such as the hL;h"JaJ~ pro-gl'a"'1 need by tl:1e US$ 6 million c xi:'nba?:1k lean. Half of the 100 :ni11ion cruzeiroE loarl ext9ndeCi by tho Brazilian Ciovernr:ent vlas used to fin.?nce an "Economic DevGloprrl(';:nt PlanH for Cl sjx-year Deriod, 1942-L7, and the rest for a "Public liIarIcs fldn. n Act'la11y, almost half of it was used by Govern­ment investr.1Gnt on official agencies and co:'pordions. Since 1948 -progre.IDS for economic dev;;;;lopment hflve been undertaken by the Goverm:lent by borror:dng from the Ba..'1k of Paraguay.

A t the end of last year, the budget 1.)'hich was in effect during the calendar year 1950 TrJas continued until Jw.e 30, 1951, and was apparently

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cl05ed 1dth an overall deficit of ¢ 14.4 million for the lB-month period. On July 1 the n13't1 budget for the fiscal year 1951-52 'ltiaS approved, ryl'ovid-

for ordinary expenditures of ¢ 170 rlil1ion and revenues estima.ted at abo11t r} 140 mj.11ion. The estimated deficit of ¢ 30 million almost doubles tLe ons originally est:.mated fOJ.~ the 1950 budget of rp 16 miJ.1ion. It is estimated that about 90% of the tudgeted expenditures for fiscal 1951-52 ",Jill be ·,lsei.L for the ~Ja0'1llent of salaries (raised 30%), acquisition of materials and other c:Lsumption expenditures. Capital outlays include about, ¢ 6 mill5.on for cor'struction and maintena!1ce of existing roads. Other so-called "public i-J01'ks!t expenditures go for repairs of buildings ffi d other indirectl;:r rJroductive investments.

T:1e Llinistry of Finance is apparently deterrnined to attempt to ;'-wld e::penc.::" t'J.res to actFal Governnent !'ec::iy;ts 811cl to increase re-venues by 8c1ont­ing -- to the extent poss:'b1e -- t~1e recomrnendations of the fisc21 9X'FSrts of Point IV Prog:ram. ~Jevert;leless, it "rill be difficult for the Government to halt borrmJings fr0m the Den1\: of for the cap:!. tal needs of offi(:ial cor~orations, such a.s the electric p1ar:t, the merchant fleet, etc. So far thic yec-r, cr00.its of ~t 1'2.1 million for !!intustrial" purposes have been oy;eYlcd at the of Para,-:,uay, L10st of ~rlJ.ich apparently are to be used for 8m<:m:Lon of elect:'j.c nmrer suppl:r. Altho'lP';h ordinary expenditures eav be lot-ler ttan budgc.;ted, the' aggregate deficit for 1951 ... 52 idl1 probably be larger than during 1950, since a substantial increase in revenues is not ex ... pected for this year.

c. Bank Credit

In 1944, far-reaching reforms of t''18 mOLetD~r and exchange s~rst'3ms, -,Jhich :'Jere largeJ.y formulated under the '!,uidf'nce and active assistance of represer:tatives of the D.S. Federal geserve Doard, tIere put into eff i3ct. The cl:rrency 'It.ras unpegzed from the Argentine peso; t:le Argentine peso ceased to be legal tender; exchange controls were instituted, exchar.ge rates stabilized clUd the Hhole banking fiB.chiner:, was reorganized.

The P8.ragu8y~m banking system presently cO:"lsists of the Bank of Paraguay ar;d three foreign banks (Argentine, Brazilian and Bri t.ish), v!hich by preference and by tradition d.eal strictly in c':>l1lmercial a1 d +'oreign ex .. change operations. The Bank of Paraguay, 11,.1. th 101mB and discounts as of December lS'50 of If 1913.0 million (as compared tl:i.th ¢ hO.7 for ell fo::.'eign banlcs) is the only source of C~lI'rency issue, the fi.scal agent of the Govern­ment, the exchange control bureal, a development oan1{ and source of Govern­ment credit. It co: Slats of 3. Nonetary (Centr21 BarJc) Department, a Banking Department (Commercial Bank), a liortga?;B ancl Savings Department, an Agrarian Department and a Commercial De:?artment, ani the SU7Jerintendency of Barles.

The Bank of Parz:ylG'.:y vms ori,],in&lljT established in 1941+ Cl.S an 11 3 11 .. purpose bank g -, The Iionetary Departnent ':Jas to h8.ve central bffi1k functions; the Barking Depa::-tment vias to engage in ordinary corrmercial credit oy;)erat.ions as "!ell as to extend cred~~t to the Gm~ernr!ent under approy:ril1te safarr,t:ards; and tte Lortgage 2nd Sa-vings Dep8.rtment \:..ras to chan savings into long'r­term agricultural, i,1dustrial and constructi on 2.oans. This tyoe of barJ: vms established because of the limited availability of funds and personnel.

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Since then, hO'wever, the Eonetary Department, iriith its central bank: f1~ncti'Jns, progressively subordinated to t~1e other departluents of the

19h7 tl-:e Agricultural Bank of faragtlry t-;as liquidated and its <:,esets on(1 li2bilit,ies 1/;ere absorbed by the Bank of Paragua;y-, ~mich created

Dap:crtment for that ptTpose. At the same tiIl'-e, the Credito H.;.bilitacion ~CAI-I), a dependency of the Agricultural Bank, "Je­

C:~:le a, fi;Lancial responsi~)ility of the Bark of Paraguay, but it Has not :,,(:t;'8.J :Lncorporatecl into the Bank administratively until 1950. In Decerr:oer

, sevaral of d:'Lvisions of the A gri cuI tU:J;'al Department ~'Jere reorganized ::"r::to Till:::t no\;] the Commercial Ie?artr.1ent for the se=-Ung of agric'..lltur.rl implemeds and mC'ci1ine:-y and other vario'J.s !,ur::)oses. In SeptalUber 1950, the i1crarian Council vIas formed as em over::>ll body to superr:_se :3nd coord::Lnate the op'3rat:1.ons of tLe Agricultural and CO!"JnerciBl Depl'rtments [lnd the C1\1-:, and to coor~in[~te thsse :,vitl1 the ivork of other Goverrf~1ent agencies in the agri-

cultural field. Also 1949, a lat-J' l-!aS passed authorizing the Bank of P",ragua;y to purchase certain agricultural lands ana to sell thes8 to c0lonists under the CAli prcgra.l1l. As a result of all these addi tiona to th8 Eank t s str'J.cture, many of uhich h8ve flot even been fomal~.ze(:, the Ba'1l-:: at "'resent is adm5.nistered by tl:ree Boards ",t the top level, j.e., the C01mc~,l of Ad,... minis t:cation , :lonetary Boa::::-d an0 Agrarian cm.mcil. Some ind:!.viduals are members of treo or three of these boards.

The Governrnsnt of has nOl-! dec:L0.ed to c out a cor:::;lete reorganization of the b?nkinG ;:;ysteITl order better to implenJf::nt monetar:T and cr8di t policies. To this c:t the request of t~1e Government, a jOil:lt Rzserve 2.nd ii'iF 2:T'0u;; has on tl18 reorgani-z2.tioll of the of Accor(~i"lg to Govel'::-;.:":1ent~lans, v1hich are ex;JecteCi to be cons~unrilCt ted at the end of th::'s year, the I ~o::leta.ry Depe.rtment 'Hill be transforIiled into an ind8pe~ldent state-01'J1ed Central Bank. T':1e Governnent inte~'lds to obtain a foreign techn:'Lci2n to cerve as a f~_nanciAl ;;;.nd economic adviser -:'0 the Central for at least the first six mO:lths

its opera::'ion. The Ni 11 bBcmne a'1 indeT)(;nc1ent institution, as it ~vas oc::ore, a tte Goverm1Cent Hill provide resources for c:;dministrEt~_ve ccrrent operations. T1:e rest of the departments of the Balli\: of Para(',l.lay 1·r11l co ntinue to , in genersl, the same functions as before but they l!.ill opernte irJi thin one organi zation ,J1'088 modn purpose funct~,ons

a De"lelo!'ment Bank. Tl1is reorganization sr-ould riiake for Greater ifl administra.tion policies.

4. INTERHATIONAl EC·,)lK'I~IC RELATIons --------------~,------------------~

a. Foreign Debt 8.nd Investment

The history of the Paragu~yan foreign debt has been complicated by defaul ts and transfer difficulties. On i t.s present outstanding debt, h01v-ever, Paraguay is up to date except relation to Brazil, 1-Jith Hhlch ar-rangements a:;:'e nOH being negotiated. external debt of Paragu.ay '[;Jas t.he equivalent of US:::; 16y57 million a.sof October 1951. Of this e1nount 28% OJ:" r-,"c<" 4 6 ~ m';" , ~ o· ~, b I • U '" d 1" d h ... . . d . tl..

VI.,)'i+' " ;J" ... .L ...... n, :.LS pa" a ... 8::tn .C/. 0 .Lars an "e ... en,aJ..n er::tn 'LJ.e

-·14 -

equivalent of US~,~ 10.3 million in cruzeiros, US:" 0.95 million in Argentine pesos, and USS 0.64 rrdllion in sterling.

All loans are fully disbursed, and only the sterling debt is repre­sented by publicly helJ bonds.. The present sterling bonds are the ont.­stane-in,,! balance of the only public offers of Paragua~ran bonds vlhich I'Te:l"e

i:'1 1371, 1872 and in 191.5. Service payments on 8.11 three loons ue:te il~reGular until 192h, when the present settlement was agreed UPC::1. Payrilents under ·the asreement of 192u i'Jere suspended in 1932, resumed in I~arc:1 1938, and &gain suspended in June 1938, to be resu,"1sd as to interest only in August and in full in Novem.ber 19HI- t'rith full settlement of :i.nterest 1".I-rrears.. Payme:1ts are nOl-[ being made <;,ccording to schedule. These bonds pa;;; interest at the rat.e of 3% and are due by 1970. At the ;)resent rate of service the debt be Hmortized in 1955. These bonds are quoted at 62 3/~% on tho London stock 3xcl1ange, ;yielding about 5.807 to the 1955 maturity and 4.78% on a c1,lrrent basis. A lien on export taxes on yerba mate and hides is plGdeed to the service of the Sterling debt.

The Export-Import Bank debt (norrl ~:2.4 million) is the outstanding balance of a credit of US:Pj 3.h million authori~ed on June 1, 1939, and of a credi t of US~; 3.0 million authori zed on Hay liJ, 1942. Both loans vJere for hight-lay construction and only US;'~ 6.0 million 1'Ja5 uti.lized by Parac;ua.y. Service payments 011 the8'£) loans, :lnd. in particular pa;yments on princif)u:!.., have been made irreglllarly, but all ;Jayments are nO't-l up to date. Final maturit;y on these loans in 1953.

The Port Concession Loan arose .f!~m ? contract bet'loJeen the Para-gU.ayan Government and a Uni States construction company approved in October 1927 for improvements to ane. operation of the Port of J'suncion, at a cost of US'~ 2.5' y,d_llion. The C:ur.pany i,Tas C~:2ven a concession to operate and maintain the port for a '[ledod of eleven years a.fter its opening to traffic, ':lhich occurred on December 18, 1929, During tile life of the con­ceSSiO!l littJe ,;ms 'b:" the Government on account of the loan, and when the concession expirecl in Dece!nber 1940 a settlemect tTas mac.e and the port r:a,t:'.onalbed. Under the settl'3D1ent "Irinci Dal 2.nO past iL:terests 'Here finally scaled C:OVJ;l to USc 2,725,000' payable over thirty years vnth interest ~~t . Pnymcnto on tl1;i.;:; d.ebt UD to d!".te. The proceeds of po;'t dues (',re pi.edged to t.he S8l""licc Df this debt.

The Argentine pesos debt arose from 8. 10 mi.llion 102D cranted in February 191:6 in A:::'ge::1ti::1e pesos lJy the Banco de la Hocion !rgentina to the Eal"]~ of Parar,:ua;T for use in its Lortgage and Savinc-s Department, to be repaid i.:1 ten eq::_al payments lTith interest at 3 3/4~1, "lith fiml maturity in 1956. Service on this debt is up to date.

There are tuo cruzeiro debts, one of Hhich is of cOIl'Jnercial orJ.c~n m,red by the Dank of Para6ua~r to the Bank of Brazil, and the other oHed by the GO'Irernment of Para~;ucr,' to the Gcvern:Llen-~ of Brazil. 1':1e commercial debt amounts to 100 millioLl cruzeiros and rCTJresents cruzeiro arrears "rh;ch arose during the ~Jar and immediate post,{;lEr peri.od. It Fas consolidated in Septem­ber 1?51 and i-)i11 be repaid in eight equal annual payments on principal hith interest at 3 1/2;~ per year extending through 1959. The other cruzeiro debt

External Debt of ParC'guay - .

October 19.~1

In currency Expressed in Item

~----.------~.-----------------of pa~~ent U.S. dollsrs --._.....,....- .. _ .......... --

Dollar ::Jebt :;'X90rt-Import BarIk 4%, 1939, 1942 .. 1958 Asuncion Port Concession Corp. 5%-1971 Union Gil Company

Total dollar debt

Cruzeiro Debt ; .-

Banco do Brasil 4/&-1958 1/ Banco do Brasil }~~-1959=

Total cruzeiro debt

Argentine Peso Debt Banco de la !;~cion Argentina 3 3/4%-195Jl

sterling Debt " i

Sterl~ng bonds 3%, 1836-96

Total Debt i ,

(In thousands)

Ii' 2,416 ~" 2,163 ." 76 2-._. _

<"; 4,655

Cr~; 90,960 Cr~'100,£9.2

Cr~190j960

~$ 4,756

230

2,416 2,163

76

4,655

4,916 5.,40~

10,321

951

645

16,572

Hate: - The follo:n.ng exchange rates ltJe~~e used: £ 1 • ~;2 .80; ~~l c 18.,0 cruzeiros; ~1 - :; Argentine pesos; ~;1 .. 6.00 guaranies.

11 Obligation of the Bank of Paraguay.

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arose from a 100 million cruzeiro credit, td th interest at 4%, opened in 19~2 by the Bank of Brazil to the order of the Bank of the Republic of Pa1'8gu",y (noo! BBnk of Paraguay) as fiscal agents of the respecti-ve govern­ments. This 1o~m 1:lClS to be disburszd within six years in tranches, 8.nd to uS L:.sed Paraeu~T in the financing of an economic and public uor~cs pro-2::;:'<1111. The several tranches "Tere to be repaid wi thin ten years from the c::te of their respective issuance, vn. th Dmorti zation scli.edu1es diff3ring 2.ccording to the t:rpe of projects financed. Final1-J'ithdravJal under the 2.oan \!£s nade in 1947 and the loan was e:;;q:acted to be retired by 1957. LOF1ElStic revenues "ere pledged to the service of this loan. According to the Para';;t::.ayan Government, the guaranies corresponding to service require­ments have been re6ularl~{ deposited Hi th ti.le /lsuncion 3ranch of the Bank of Brazil. Si::1ce 191~7, h01'lfever, transfer into crt<.z;eiros o~ these amounts has not been effected. It is estimated that by the end of 1951, the gu:Jrani equivalent of 35 million cruze5.ros of principal plus an undetermined amount of interest ~d11 not l1ave been transferred into cruzeiros. According to the Paraguayan authorities a settlement is proposed under vJhich either the term Hill be extended, or a part or ru.:i.. of tl'le pri.lcip,""l i-Till be accepted in gu.aranies by t:1e Ban!~ of Brazil, to be u::;ed to incrense the capital of its branch in Asv.ncion, and thus ~dll not be subject to transfer ..

Under existii1g schedules service on the forei~n debt (excluding the inter-Governmental cruzeiro debt jU3t discussed) uill decline steadily from a pea}: equiYG',lent to us~~ 1..9$ million in 1952 to the equivalent of us:~ 929,000 in 19:;9, thereafter faLling abruptly to ~:l77, oeo in 2960, and remaining at that level until 1971 by 1<1hic11 time the present forsign debt ""Jill be totally paid off. Annu.al ~ervic6 payments aV'9rnge US;,~i 1.78 million equ.i.valent for the period 1952-56, or about 6% of exports of US::' 30 million equj.vC)lent. For t::"e follovung five years, 195' .. -61, service falls to an anr.ual average of US~~ 676,.::;00 equivalent and thereafter is lOvier thm 'Usc:: 200,OeO equiva ... lent. Dollar service presently averages 37% of total s8rvice during 1952-56, 2;1d 33% during 1957-61. Service upon the Brazi1ia.n 10,311 excluded from the abov'3 com;:.iutation ,;ould, according to contra.ct, have averaged tl1e3quivalent of US!') 637,OGO [nnu.ally for the period 1952-56. It is not possible to kno1,r at present uhether the ;1sgoti2tions nON under 11ay 1rJill 2ffect th5.s scheQule nor 110v,r the Gxisting ar:;.~ears of trt;Dsfer v;ill Qe settled.

Totel foreign direct invest!1ents uere estimated at about US':: 60 million in 1950, '-'lith Argentine. cont:::'ibuti!""lg 43:1 ar:d Great Britain and the

StC'Jres 23% and 255~ respectively. The ex:ch<?nge b'~dget for 1951 allo­cates US:::, 1.2 :nillion for dividends and interest on foreign private capital, or about 4% of excha~lge receipts from e:x:ports t.hat yea.r. Private foreign capital inflovr in 1951 is estimated in budget at US:"; 1.6 million;

- 16 -

this e.ppears to be a rather optimistic estimate. It is not at present ;(no~m ~J:18ther a cont:nued :Lnflow of pr:!.vate foreign investment can be expected. Ho~:everJ some of the nitrate companies operating in Chile have been negotiat-

1uth Government for ,ermission to invest in the ca.ttle industry and to e::po::-t meat by air to the northern p~rt of Chile.

b. ?creign Trr.de and E:{:change Position _,_ ... __ .,_ 4 _

principal eA-port produ.cts of Par<;l.;:;uay, Hith their percent2.ges to total export value in 1950 are: lUl'nber (27%)) quebracho extract (171), cot­ton fibers (20;;;), hides 8.l:d skins (11%), processed meat (11%), essential vegetable oils (61) and others (8%). Total exports 1950 Tllere US~', 36 mil­lion, times the vab.e of exports in 19ho, w;1ile Ennort volmnes increased t1jO and one-half tj.mes c:.urins; S2111e pe:dod, iii. remarb;l.ole achi.€7ement. All e~;:po:rts still Se0l:, "to r8asonai)le ffi9.:i'c:in for expmsion cdth lurr.ber, cot .. ton and processed meat offering best possibilities.

F.O.B. imrort vt'lues 'Here 7.7 mi'.lion in 191+0 and inc!'eased to ,,' 28.h million in 19h9, then declininz to 23 million. in 1950. There

is 110 available data on import volume, but taking into account general 'world p:;:'ice increases it '!Jould 1:).Dpear that it bE'.S increased less than export volune in the last dGcade. It is ~)robable that the increase in exports earnings has uot been devoted. e:ltir81y to increased imports but also to meet higher river trc:nsportati on costs, ar.d more recently a}.so to increase exchm ge re­ser-ves. The most important categor:· of iHlpox'ts is the g:'~OU1J comprising agricultural m&chinery, iron and its ma.nuf~lctures, rr:achinery in general, and transpo::.'t equipment., includinp; automobiles. This group accounted for 23~~ i.n 1940 and 30;0 in 19~O. ,s,e::::ond in imnortance are fooG.stuffs imports (about 80;1, Hheat) J vihich accounted for 17'j{ j n 19ho and 21% in 195'0. Gasoline and lubri­cants ~1C'ye not kept pac~ i-Ji th the increase (?Of',) 0::: total imDo'!'t valJ.es, and their percentage contribution to total 'arts has declined in the last decade 2:1'01'1 about 6;~ in 1940 to 3<)2~~ in 1950. The 'Volu1Ue of te~::ti1es !,:anu­:f2"ctures irl1ports haG declirled frorn 23% of total imports value in 19LLO to 217~ in 1:;;.~0. This indicates that there has been a substitution of innorted tex­tiles by local mar::ufact.l.'.res. This trend "i probabl:~ conti.nue since a ne~J, and relatively hrge, textile "?l,~mt "ras established last year. 't<Jhen the ex-p~wion in electric pOHer takes place t.his textile pla.nt "rill operate full c8lJaci ty. Pharrnac8,_'.tica.l pro~ucts have increased their share of total ir:,ports dUring the sa.me pedod accou..11ting in 1950 for about 51t of the total as com ... pared 1'1j. th al)Ol'!.t .3% in 1940.

As a consequence of 'Jorld lIar II, the geographic distribution of trade suffered some changes but no specifj.c trend has been set yet.

ParaS"~a:;r: Geographic Distribution of Total Value of Trade .... -- ;'" --_.,----- -. ------~--~~ cf of' rr-ot"l r:::-m· o' ··.ts---Ii) ,l., -'- 0.. .' J_""-.L"- .... 1.

1937~C)31J 1949 1950 -----------;:,:-:::;..:.~;;...:;,---. .. ,. "'-."",~.~-,,. --Argentina 19 21 35 36 Argentina Germany 1.3 14 2 Japan Uni ted K:l.ngdom 11 13 h 7 Germany United states 8 12 1 3 United Kingdom Shipped in tran~it 23 26 52 34 United states

Brazil Source: IFS

% of Total Import~ i937 i938 19'4Sr 1950

I I ~--

40 38 22 27 14 15 2 14 11 3

9 10 18 9 8 10 33 25' 1 1 7 5

- 17 ...

It kno"tm that a large amount of the exports shipped flin transit" through Argentina go to the U.S., U.l'~. md o:'her European and Latin Americm coun­tries. There are no statistics on t:le arr.mmt going to each, but data on ex­c~1anBe earnings from exports during the last tvTO Y'ears (1949 8.p.d 1950 are

only ones availa."ble)" indicate that Paraguay is earning about 4o~ in l.S. :::lollars, mainly frora quebracho extrnct, cotton 2nd hides :;;;1?rn-

1iO'J.nds are about 15% to 20;~ and about in Arg8:1tine ~(;S.os. Ar:;e~-;)0805 are v.'"'luable to Pnro.gu::-,y, 1t~hich is on average in defic:::" tFith

';~:'J!1"~im~~ especiD.llY on i~wisib}G items. rhere is.,.:;rn agreement, d~t~9 +?tf~' Y~l:.ch Pc.l'a~ur'.Y c.'J.n buy arg'3!1hne pesos "'i1. th ster ..i.~ng to cover a e.er ::;.c:.-.:.

• i.:':'Y improvement in Paragucyt s receipts of pesos ~~S aV2ilability of sterling for other purposes.

An overall balance of ":Jaynents SUmr.1aI"'J is presented in Table 1, based on foreig;n exchange transactl.ons vnth the ban!dng system reportedly covering about 8S% of total transcctions. The balance of payrr:ents surpluses charac­teristic of the l,mr period were rev0rsed in 1947, mainly due to the Civil 1Jar of that year Iv!lich disFJ.pted production and trade. Pa:yments deficits con .. tillued in 1948 and 19~9. puring 1950 exports alm.ost rega.ined their 1946 volume while the unwei ghted export price inde:{ more than dou~Jled from 1946 to 1950. Increases in both volume and unit value of lumber exports during 1950" and the ar;plication of ver:r strict quc>ntitati ve import and exchange con­trol:::; Hero largely respo:1sible for the achievement in 1950, for the first time !n the post-liar pe:dod, of a favorable bala'1ce of pa:%ents position to the equivalent of U'3~:; 7.? million, rep12cing a deficit of US:f: 1.7 millio;J equivalent in 1949. At tht;! end of June 19S1 gross gold 8.'1d foreign exchange assets had increased to the equ.ivalent of US') 18.2 million, of v:rhich 26% ~'~as in gold and dollars, and are expected to decline duri!lIT the remainder of the year o'!tJing to the seaso:1al nature of exchange receipts.

c. Exchan~e Rates and Practices

The authorities re::!.ied heavily on direct quantitative import and ex ... change controls during 1950. This policy ifas su.ccessful insofa.r as it eon­sicerably reduced total sales of exchange, but the multiple rates system adopted at the end of 1949 "t-Jas not implemented with a proper dh;trl bution of corr..modi ties runong the di£ fel'ent groups and The larger part of both e:;~ports and imports concentrated in pref €!'ential ca te gories , and as ~ conse­quence, the Bank of Paraguay ~as bUJ~ng exchange from exporters at a higher average rate (in terms of guaranies per dollar) than the one at which it '!tias selling exchange for imports.

Effectj,ve Harch S, 19$1" the parity WaS changed from y5 3.09 to ¢ 6 per dollar 1,ri th the concurrence of IEF. The nell rate applies to the offi­cially G})praised value of major exports (most importantly lumber, quebracho extract, cotton, meat and hides), to certain Governnent receipts, to d.esig­nated essential imports, and to payments for public debt servicG and Govern .. ment transactions. The neH' exchange system also introduced another official rate of 9 guar~mies per doll:Jr, applied to the off1ci",11y ap pr3i sed vaue of minor exports (including petit~grain oil, tobacco, vegetable oil, sugar a~J tanned leather), to registered capital and certain invisibles, and to desig-nated imports not permitted the rJ 6 rate. The free market "lrIaS leg<?.1ized and is used for invisibles and for proceeds of such e:xports as are not required

- 18 -

to be sold at the 6 or 9 rates. LUY.llr:" iT1portS will be prohibited tempor­a:r-ily, as it l",as felt teat during 1950 a sufficient amount 1rJ'as imported through the "compensation systemHs.nd "imports ld th ovm exchange.n

The regtL.ations of the ne'l-J ey.change s;rstem established an exchange b"J.d,get, to be prepared and executed each year.. The first exchange budget uas pre:)cred lfri th the assietance of EIF, <'nd estimates total rocciptG oqui­';'2.:ent to US~~ 50 .. 4 million (e;ports, ~~)42.l million; services and cap::.tl1:J.., e.3 million) including both the official a~1.d the free'marI(ets. This is

'7 m,:,ll:Lon mo:;.~e than the estimated 'OS~~ ir3 million transacted in both T:lar­in 1950, "hen official receipts from exports, excluding the free market, US '" 3r-' 9 ... J . f . ,. t 1 USI" 1 3 . 1'" . "', 1 ~'Jere :", -:J.. l11~J.. ,lon rom servlces a!1Q capJ. a_ ".'.. n';l. ..... ..Llon. vn 't_1e

den:ar.d Side, the 1951 budget alloca+,es US:;'. 31 .. 1 million to essentiBl irr.ports (luxury im:!)orts beine; prohibited), US(~ 11h 7 million to invis::ibles cmd 4.6 mill::i.on fo::.' the increa3e of intel'n~_tiona,J. rese~es; these three items are e:~pected to 8."'.:lsorb the '03':; 50.4 million ostimated. receipts. Buc.geted essen­tial imports for 1951 are abot't 35% higher than to-tal imports of US"': 23.0 million in 195C and a1;Q1~t 90;;:; larger ti;an essential i:rnports in the sarne year estil1!a::ed at only TJS/: 1£.5 millie.1. This mir:,ht permit ~ substmtial improve-nent in the COI11.\T10di sup;:,ly 8i tuation de;::endi upon the final composit:Lon of 't.r:e group of essantial im:Jorts and upon the in foreign prices between 1950 and 19~1. Due to the recent declL18 [lorlcl prices of certain export products, such as cotton, the increase in int.er::1at:l.onr.1 assets will be smaller tha."1 budget3ci, but tlle 1)151 balance of pz;yments is still expected to show a S1.1r:? 11.:8.

lJhen the prov~,ded teChnical assistance in the prepamtion and im..., plenentB,tion of the \3xchange btH..1£:et, it indicated that flthe r-~or:etar'J Board of

}jade of." Paraguay nO\<1 1;.<:"8 at its disposal the neceesary eler::ents on 1-Ihieh to bClse a set 01 adequab3 procedvres for ~1. locating e:cchan~e, int0:nded to s8.t:Lsfy the ba.sic needs of the economy and to giV8J70Ilfic:;,ence to the im­porters regardin7, t"eir prospects for tile future. II... It remains to be seen 'tv"l':'8ther import licer:.sing &nd exchange allocations can :in practice be oper£ted smoothly enough to achieve these purposes and t'Jhether the Jv!on(~tB.ry Doa::,d can consiste'1tl~" <Sf plJT the cri teria.,. suggested by

S.H. No. 58'1, First Eeport of E:xct2anc;e 1:i53ion to Paraguay, April 30" 1951. -....-' -- .-.....------

.... 19 ...

;;. CREDITHORTHINESS

The bal~lce of payments prospects of Parav~ay ap~ear to be good in the short run. There are good possibilities for expansion of export vcl-UlE"S, unless offset by a general end su')stantial decline in Horld P:':'C8S, ex:?ort values should avers.ge more than the 19$ -50 average of an equiyalent of uS1'~ 30 million (official receipts of excl:ange). 1-1hile totDl ill:.y-iorts pro~Jably increase, roth in volu.rne ar.d value, there are IDe.ny opport1..U1~L ties for substitution of present imports by local manuf2c'::'ures, such as textiles. Invisible items other than traYlsportation are unlikely to af­fect finol results. Any increase in transportation costs r31ative to the value of foreign trade lJould prob8.bl~T reduce imnort values, leavin~ current account balance unchanged" Sirles irJi thdra't-Tal of the Union Oil Company of California there has been little nelol foreign direct investment in Par8r:;uay, and no great inflow on this account can be expected for the next fe~J years. Some repatriation of private Parr-;.guayan fl:md~ held abroad is, hOvrever, P05-

sib19 if politic81 stability continues.

Long-run prospects for the balance of payments and the general credi t~>TOrthiness of the countr~T 'tn.ll largely de'l)end upon the economic poli­cies of thf3 Government. Tr..e Pai1k coule, by keeping in touc!1 vri th the Pars­guayan authorities, and lending its assistance in the shaping of develop­ment policies, contribute materially to a strengthening of the overall economic -51 tuation.

Any lending to Par9.guay involves political risks rather higher than for many countries, bece.use poli+ice.l c3~isturbances caYl interrupt p:;.oduction, cause c!9.pital losses particularly iYl agriculture cattle, and provoke flight competent personnel into political refuge. Nevertheless, the meet­ins: of foreign o~)li~ations is apparently re:rarded as a primary- concern by all responsible people, both inside and outside the ruling group~

The balance of payments prospects, the present ratio of debt service charges to e:;i;chanse recei pta 28 set forth in page 15 and the rapid rate of ar·,or1::.ization schedule of indebtedness nm"! outstandinG: all indic@te the.t Para ::ua~r St10uld ;Je able to assume in. thout serious strain some additional service charges from 1954 to 1956, and a mederate additional amount from 19~7 on. SOHever, until 1957 '[;hen :f'oreign debt service (including dollar service) declines sh¢:rply, it i:ould be desir~ble to minimize additional service charges, applying reduced amo:rti~,:J,ti,:m sChedulea in that period. O~'Ji...-;:!, to the make-up of curreacies e8.rned. exports, Paraguay's creditl,mrthiness in U.S. dollars rather tight. Risl!,: would be reduced if lending were partly in dollars and partly in other currencies, such as ster­ling.

Until the present budgetary and inflati.onary 5i tU9_tion improves sub­stantially, any lending to Paraguay shoulc', be for Drojects requ:Lring the

- 20 -

least possible amount of budgetary funds. The <'.'vailabili ty of non-:.~1::b"tionary funds for de-"elopmental purposes '!rull largely depend upon the effective imple-mentation of' measures being 1.-lorked out b;)T the three technici~.ns of v.0. Po:;'nt IV. Here aeain, help from the Sa.ILl{ could assist t~1e adopt:L()n of [,lleil recml1f:lendations.

RESTRICTED

T.2ble ... .!.

P~ro.F;UC1~:r-: Official E:~chant::c Trar:s [",cG:ions --.- ... 1 i . i .-Clillio~ Dollar Equivalents)

~~.;.::;;:;:.,:.::;.;:,,, .. ,=--<"':::r,::;;- __ :.-_ .. ,,-- _--,1941-·41~ 1945-46 1947 1948 1 949_ ~ -2:950 1941-50

Eeceipts 36.4 53.8 28.1 29.7 28.1 35.6 211.8 Pe.yments 39.2 4701 27.1 32.6 30.5 23.Q 200.4

Ba18nce -2.8 /6.7 /1.0 -2 .. 9 -2.4 fl2.6 /11.4 •

NON-TRAlli Cl:JRP3ThTT R . + 21.4 4~1 3.1 3.0 3.2 .0 at;~8 ecelPusy Payments1 15¢ 7 11..4 a ~ 3.2 2,,4 2.3 4~3 ./ .. ..,/ -

Bal~'nce /5.7 -7.3 -6.2 - .2 f .8 -2.3 -9.5

PRIVAi:E CAPITAL

Receipts 2.0~ 4.&; 2.4 1.9 1.9/ 1.3 13.8 Payments (principal) neg.Ei 1- .8 3.1 .56 .2 5.7

Bal[1nce /-2.0 f3. 2 fl.6 .. 1.2 f1.4 /1.1 f8.1 JOVEBlTIEEET G...1i.EDIT O~l'IOHS

Receipt ::J 6.4 / 3.~ 2.4 3:a

.0 .0 12.9 Pa~'IIlent . 1..75 2. 1 .. 5 2.0 2.6 13.7

Balance /1+.7 fl.l of .9 -2.9 .... 2.0 -2.6 - .8

JIIERtJ.·L ].!tLANCE 1-9.6 f3.7 -2.7 -7.2 -2.2 f8.8 of 9.2 ----

Source: Bank of paragu.e.y. 1!Exc1usive of forei~l debt service, but inclusive of returns on private

oapital. 2/Estimated. ]jForeign debt service. interest and amortization,

61.. 60'

IB O + +

B o L I v I A

20·

~~~ '" ~ " .. ~ ~~

<J:,.. .J.:

24° + 7

~ "

<Y

r26° + +

I ~

I 1?

ts· + 6Z.

PARAGUAY PHYSICAL MAP

SCALE CW MILES 0---- -.---I1XI-~- 150

SCALE CW KILOMETERS o 50 100 4"50

+

60·

I .... PORTANT CITIES AND TOWNS . .. . 0 RAILROADS .. . +1+' .... ' .... ' ....... -+-4

:Z::!ES ..... ::.: ......... -.. -.-... ....... __ ~

~

,/'

ELEVATIONS

M[TEAS nET

1e40

200 656

o o

.......... ~.

''( 1

+ \\ f I I

/ \

r b::1 I , /

I I

" oJ rr

IB"

1O~

~ '7

~

/

.(

-v -,,)1 . - l./U44ndY' )t /.1 ~ ." :.·~ .l

+ ~

30· +

-<1.

+ -<'y

,\)

'\,

<'v

~

2Z'

zo"

j....,.

~ I

'If).

!J ~.

United States 7ariff Commission -Dec. 1944