Lea Giménez and Benigno López, Paraguay’s respective outgoing and incoming finance ministers are working together to ensure the government's groundwork on economic reform continues seamlessly. Silvia Pavoni reports.

Lea Gimenez

Lea Gimenez

Continuity between governments, even of the same political colours, is quite rare – particularly in Latin America. But this is what Paraguay’s finance ministry is keen to guarantee.

After the presidential elections that replaced Horacio Cartes with Mario Abdo Benítez in April this year – both from the right-wing Colorado party – finance minister Lea Giménez passed on her mantle to Benigno López, as of August 16.

Both officials want to build on the progress achieved by the ministry and, more generally, the government – from more controlled public spending to improvements in its infrastructure and trade. The update of the antiquated tax system remains a key priority, says Mr López, and his predecessor Ms Giménez is keen to facilitate as smooth a handover as possible.

This is why, in consultation with the incoming administration, Ms Giménez set up a special commission that includes former government officials and other experts to provide analysis on existing plans and advice on future measures.

Tax reform

The reform of Paraguay's tax system is an essential component of the country's economic growth plan – and something that both former and current finance ministers acknowledge needs the backing of the wider population. “We have to be very careful about how to present this to the public because it’s a very sensitive subject,” says Mr López, referring to fears about tax rises.

But the changes are crucial, as tax is the “backbone” of the economy, according to Ms Giménez. “Our [tax] law is truly outdated – the ‘spinal cord’ of the tax system is from 1991 – and that needs to be modernised. It’s much more than redefining tax rates. This is about improving the transparency of the tax system, improving the capacity of the revenue agency to collect money and go after tax evaders,” she says.

Ms Giménez is particularly proud of the special commission to provide analysis and opinion to future administrations, to ensure the way public sector decisions are made is more transparent and based more on facts than it is influenced by political considerations.

“We decided that we were going to put together this commission – we discussed it with Mr López – not just to pass [the work on] but also to have [experts and former] ministers of finance participating in this technical dialogue,” she says. “This work is really something [unique] for Paraguay. We want to have discussions that are based on evidence.”

Mr López welcomes the initiative, saying: “We’re receiving information about the tax system and the needs we may have. We have a huge agenda for the next five years: to improve investment in human capital, and to keep working on infrastructure investment. With the information we’re gathering from the commission, we’ll know what we can do, what we can’t do, and what we need to do to improve financial [resources], which is our main constraint.”

A revised GDP

The urgency of this analysis is made more obvious by the results of another revision – that of the country’s gross domestic product (GDP), which took three years and was completed in the second quarter of 2018. “After the revision of the national accounts, we saw that our economy was 30% larger than we thought,” says Ms Giménez. “Economic matters have changed significantly over the past decade, and the tax system should reflect that.”

Mr López notes how the divergence matches up the level of informality in the country, also at about 30%. He also points out that using the previous economic indicators, the tax-to-GDP ratio was about 9.5%, while “with the new GDP [value] it would be much lower”.

Low taxation has defined Paraguay’s economic and business environment. The country’s VAT, income and corporate tax have identical 10% rates. Both ministers insist efforts will go towards boosting revenue by addressing tax evasion and expanding the tax base before any potential rate rises.

Benigo Lopez

Benigo Lopez

“There’s ample space for increasing revenue without changing the tax rates,” says Ms Giménez. She adds that because of the many tax exemptions and high deductibility of many items from the overall tax bill, “even making small changes to deductibility [ratios] would make a huge difference”.

Infrastructure funding

Boosting government tax revenues will help develop Paraguay's ailing infrastructure. Most large works would be carried out alongside the private sector under the newly created public-private partnership (PPP) law.

“We support the PPP law,” says Mr López. “And we’re working on learning the lessons from the past five years. We’ll try to keep the [infrastructure spending allocated by the previous] government at about $1bn a year. We need more but we also need to be careful with the [fiscal] responsibility law.” He adds that this is part of the previous government’s efforts to monitor and rein in public spending, which have contributed to Paraguay’s healthy macroeconomic data.

Paraguay's economy has grown at an average rate that is double the Latin American and Caribbean average over the past decade, reaching a peak of 14.04% in 2013. (Latin America and the Caribbean closed that year with an overall 2.79% GDP growth, according to the World Bank.)

Delivering the large infrastructure projects the country needs will help sustain growth, as will supporting international trade. As a large producer of soybeans and meat, Paraguay’s economy has been reliant on exporting these goods, mostly to neighbouring Brazil and Argentina.

Ms Giménez says one of Paraguay’s most important achievements was to decouple itself from the economic fates of its two larger trade partners, Brazil and Argentina. While those economies have suffered over the past few years, Paraguay continued to grow. Not long ago, this would have immediately translated in an economic hit for the smaller trade partner. Paraguay’s economy is now more diversified and it is growing stronger trade ties with other partners. In 2017, Paraguay exported to 140 countries.

“We have been working with countries such as Qatar, the United Arab Emirates and Taiwan, expanding the quota for meat,” says Ms Giménez. “There are several countries now trading with us. They want more and more, primarily food: rice, beef, poultry.”

Fine political balance

Paraguay's relationship with Taiwan is noteworthy, as Taipei has seen several former diplomatic allies opening relations with China (which does not recognise Taiwan’s administration), including in Latin America and the Caribbean. In contrast to this, Paraguay has expanded its trade relations with the smaller Asian country.

In 2017, the two signed a deal scrapping tariffs on 54 Paraguayan products, which has a potential value of $2bn for the Latin American country, according to the government. Furthermore, in April 2018, the government announced the founding of a technological university in Paraguay that mirrors a similar institution in Taiwan and has already received 3000 applications for 400 available places. “Education is a huge challenge for the whole country,” says Mr López. “We value the relation with Taiwan and that relationship will continue.”

Ms Giménez adds: “[Taiwan's officials don't] come here to throw money at us; they come here to support us in different areas: in health and education, now with the Technological University of Paraguay. We’re sure this relationship will continue in the future. But it doesn’t mean that we’re closing the door to China. We have to be very careful about the decisions that we take. We are a small country and these things have an important impact.”

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