Following elections, Jason Mitchell reports from Asunción on Paraguay’s economic pluses and the reforms that could benefit the country.

Paraguay faces a bright future because of high commodity prices, despite a reputation for being one of the most corrupt countries in the world.

In its latest corruption perceptions index, Transparency International ranks Paraguay the 138th worst country in the world out of 179 nations it surveyed, and indicates that corruption there is getting worse. The country scored 2.4 on its index last year while in 2006 it attained 2.6 (on a scale of one to 10, with 10 representing the least corrupt).

However, the country’s economy has been growing dramatically, mostly on the back of rising soya prices (they increased in value by 80% last year). Gross domestic product (GDP) rose by 6.4% last year and by 4.3% in 2006, the fastest pace of growth since the so-called Itaipú boom in the 1970s and 1980s, when the world’s largest hydroelectric dam at the time was built on the Paraná River between Paraguay and Brazil.

Two worlds

Asunción, the Paraguayan capital, is a city of two worlds: brand-new Mercedes and Range Rovers dominate the roads but the centre is extremely run-down and rubbish litters the streets.

Roberto Haitter, president of the Paraguayan Association of Banks, says: “The economy has got much better but fundamental reforms are necessary. The rule of law is the biggest problem; the executive branch regularly interferes in the judiciary.

“The country lacks continuity and the government must define a policy for the state that projects five years ahead. Companies do not want to make large-scale investments because of the lack of certainty.”

Nicanor Duarte Frutos, Paraguay’s president since August 2003, is credited with improving the economic situation in the country, which has only 6.1 million people (a further two million Paraguayans live abroad). And Blanca Ovelar, the candidate of the Colorado Party, which has been in power for the past 60 years, seemed likely to be elected president in this April’s elections.

However, the country voted in the coalition Patriotic Alliance for Change’s candidate Fernando Lugo, a former Catholic bishop, who ran an aggressive campaign against Ms ­Ovelar, accusing the government of corruption. He won 41% of the votes and is due to take office on August 15.

“The country lived under the yoke of a tyrannical dictator for 35 years and is still in transition to a democracy,” says María del Pilar Callizo, director of Transparency International in Paraguay. “Originally, we thought that Mr Duarte Frutos might make a better president. But, in 2006, he made many attempts to become the presidential candidate for a second term, which would have been a flagrant violation of the country’s constitution. Furthermore, during the past two years, the government has interfered in the electoral courts and undermined the power of one of the electoral judges.

“I think that during the past few years, there have been some regressions from democracy. Corruption remains endemic and the processes of the state are based on corrupt practices.”

A new voice

President-elect Mr Lugo has pledged: “We will build a Paraguay that will not be known for its corruption and poverty, but for its honesty.”

His administration will face many big challenges, especially as one of its main election pledges was to implement land reform. The country has a highly unequal distribution of land and Mr Lugo is committed to giving the poorest their own plots. This will be hard fought against by land owners, complicated by the fact that in eastern Paraguay large swathes of land are owned by Brazilians. Furthermore, soya production is one of the most dynamic parts of the economy and Mr Lugo must be careful that he does not disrupt it.

Mr Lugo has also pledged to look into alleged cases of embezzlement by the former leaders and to purge the civil service of corrupt officials. However, these moves could require a change in the make-up of justices on the Supreme Court, which is packed with Colorado Party members.

Economic growth

Paraguay, which has a total GDP of $10.3bn, is heavily dependent on primary materials. It is estimated that the agricultural sector grew by 25% last year and primary materials generally by 14.7%. In comparison, services just expanded by 4.7%. Agriculture made up 66% of the country’s overall economic growth last year.

Germán Hugo Rojas Irigoyen, president of the Central Bank of Paraguay, tells The Banker: “In 2002, Paraguay went through a period of financial turmoil similar to what the US is witnessing with the subprime crisis today. This coincided with Argentina’s economic meltdown. It is estimated that the economy lost $850m and a number of banks went to the wall.

“However, the economy has made a strong comeback, mostly because of rising prices for soya, wheat, corn, sesame and meat. There was a bumper harvest last year and a very good one is expected this year. The country should continue to perform exceptionally well as long as international commodity prices hold up.

“It is attracting investors from all around the world. There are big opportunities for investment in new roads and in electricity transmission,” he says.

Poor reputation

Paraguay became a democracy in 1989 when the dictator, Alfredo Stroessner, was toppled from power during a US-inspired military coup and was exiled to Brazil (he died there in 2006).

The country is a major exporter of electronics goods to Brazil and Argentina. It is common for Argentinians and Brazilians to cross the border by Paraguay’s second biggest city, Ciudad del Este (near Iguazú waterfalls), or to fly to Asunción to purchase laptops or digital cameras. The products are cheaper in Paraguay because often they enter it without the payment of import duties.

Paraguay has a poor reputation for contraband and counterfeiting. One of its most controversial regions is the heavily-forested Tri-Border Area with Brazil and Argentina, near Ciudad del Este.

The US Central Intelligence Agency’s latest report on Paraguay says: “[The country is a] major illicit producer of cannabis, most or all of which is consumed in Brazil, Argentina and Chile; is a trans-shipment country for Andean cocaine headed for Brazil, other Southern Cone markets, and Europe; has corruption and some money-laundering activity, especially in the Tri-Border Area; and has weak anti-money-laundering laws and enforcement.”

Conor McEnroy, president of Paraguay’s Sudameris Bank, which was purchased by Irish investment group Abbeyfield in 2004, says: “Paraguay is an agricultural country, with a small population, had a repressive dictator for several decades and at one point had just eight embassies around the world. The last attempted coup was only in 2000.

“Taking into account its recent history, the country has made huge strides over the past 10 years. Banking supervision is a different beast from what it was just a few years ago. There is now a deposit insurance scheme and strong prudential rules on bank lending. The central bank is about to back a law that will force formality and Basel compliance on the system. Currently, there is no income tax in the country but the government was pushing to introduce a flat rate of 10%.

“Paraguay should have an excellent future. Half the population is under the age of 25, and that kind of demography is normally associated with countries with the strongest economic growth.”

It is estimated that the country’s tax receipts have increased by 80% under Mr Duarte’s government, while the tax base has widened by 30%. However, overall tax income still only accounts for about 12% of GDP.

Competitive ranking

The World Economic Forum’s global competitive index places Paraguay in position 121 among 131 countries it ranks. The index takes into account a number of factors including the state of institutions, infrastructure and macroeconomic stability. Paraguayan business respondents to the forum’s survey said the most problematic factors for doing business in the country were corruption, policy instability and an inefficient government bureaucracy.

Mr Duarte has come under attack for corruption from the media and civic groups, such as Transparency International. At the end of February this year, another opposition party, the Demo­cratic Progressive Party, denounced him before the country’s Economic Crimes Tribunal for opening up a bank account for $1.6m in 2001 with the now-defunct bank, Multibanco, while he was receiving a low level of income.

Business climate

  Banks, however, are getting on with business. “Last year, was an excellent year for our bank,” says Vicente ­Bogliolo, president of BBVA in Paraguay. “It was our best year in our 46-year history in the country. Only 0.58% of our loan book is made up of bad loans.

“Agriculture and cattle-grazing make up 40% of GDP. These sectors are performing very well. To improve the country’s business climate, two aspects are key: an improvement in public services and in the performance of some vital industries relating to infrastructure, including the cement sector and telecommunications. For this to come about, one of the options could be the privatisation of these businesses or, at least, greater involvement of private capital in them,” he says.

Tobias Roy, the IMF’s resident representative in Paraguay, says: “Infrastructure, while slowly improving, is clearly deficient and creates bottlenecks. To maintain growth, there need to be sustained improvements in roads, telecommunications, dredging of rivers, and ports. Provision of electric energy is also a problem, as the system has reached the limits of its capacity.”

Paraguay is one of the poorest and most socially divided Latin American countries. About 44% of the popu­lation lives below the official poverty line and 9% is indigent. The vast wealth being made in agriculture is concentrated in the hands of a few families who own huge swathes of land.

The country has some big advantages: it has a tiny population, many young people, immense amounts of farmland, massive supplies of fresh water and huge energy potential.

However, the government must work hard to improve the roads and rivers in this land-locked country, so that its produce can be exported easily to Brazil and Argentina for trans-­shipment. It must also dedicate itself to institution-building, so that it can shed its ‘Wild West’ reputation.

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