1. General Policy Framework

Paraguay, with a population of 4.27 million, an annual population growth rate of 2.9 percent, and total land area of 154,047 square miles, has a small domestic market and limited but expanding access to world markets through the Paraguay/ Parana river system. Asuncion is the political, financial, administrative, and commercial center of the country. The capital city with its suburbs has a population of about 1.7 million people, nearly forty percent of the total population of the country.

Paraguay is predominantly an agricultural country with vast hydroelectric potential but no known significant mineral or petroleum resources. The economy is highly dependent on production and exports of soybeans and cotton which together accounted for nearly 70 percent of total exports in 1990. Construction of the massive Itaipu hydroelectric project greatly accelerated Paraguay's economy. Completion of the Yacyreta hydroelectric project with Argentina should further spur economic growth and make Paraguay the world's larger exporter of hydroelectric energy.

The change in government in February 1989 marked the end of 34 years of Stroessner's repressive regime. The new administration implemented a sweeping economic liberalization program. In February 1989, the Government of President Andres Rodriguez eliminated the multiple exchange rate system and adopted a free floating market rate. The move greatly reduced economic distortions, particularly in the trade area and in the public sector. The Rodriguez Administration has also implemented a number of monetary measures to control inflation and to free interest rates. At the same time, the government eliminated price controls on basic products, reduced export taxes, and provided fiscal incentives to encourage investment and attract foreign investors.

The decision to reinstate Paraguay as a beneficiary of the U.S. Generalized System of Preferences (GSP) program effective February 6, 1991, led to Paraguay's restoration as a beneficiary of the Overseas Private Investment Corporation (OPIC) programs in August 1991.

Fiscal Policy: The Rodriguez Administration has made control of government expenditures one of its chief goals. The central government ran a budget surplus, in both 1989 and 1990 and is projecting budget surpluses for 1991 and 1992. Despite the budget surplus many public enterprises still present deficits and are heavily indebted. No progress has been achieved to privatize these public enterprises. Currently, the Congress is considering two bills on the privatization of public enterprises

Monetary Policy: During 1989, inflation accelerated, fueled by the shock of the exchange rate adjustment and expansionary pressures on the Central Bank. Since January 1991, the Government has given top priority to the fight against inflation. This has been achieved through the implementation of highly restrictive monetary measures. As a result, the annual inflation rate has been reduced from 44.1 percent in 1990 to an expected 15 percent in 1991. In order to control the money supply, the Central Bank has restricted credit by maintaining relatively high reserve requirements for banks and other financial institutions.

These monetary measures have raised real interest rates making access to credit difficult for most producers, particularly farmers. As a result, economic growth has declined in recent months. In order to control the situation and stimulate economic growth, on July 30, the Central Bank eased its restrictive monetary policy by reducing reserve requirements for deposits in local currency.

2. Exchange Rate Policy

Currently, Paraguay does not have controls on foreign currency exchange transactions. Foreign currency may be freely acquired at banks and exchange houses. While the foreign exchange rate is free to float, the Central Bank is authorized to participate in the market to avoid unusual fluctuations in the exchange rate. During 1991, the Central Bank has played an active role in the exchange market by buying dollars in order to prevent overvaluation of the local currency. High interest rates offered in the local market have attracted millions of speculative dollars to Paraguay contributing to the appreciation of the guarani against the dollar.

Despite the massive purchase of dollars by the Central Bank to maintain the value of the guarani, since the change of government in February 1989 through the end of October 1991, the local currency has been depreciated only 22.7 percent against the dollar. Meanwhile, the accumulated inflation rate reached 81.7 percent during the same period.

3. Structural Policies

Pricing policies: The economic system in Paraguay favors free enterprise. Economic incentives and resource allocation in general are guided by the price mechanism. Recent progress has been made by the Rodriguez Administration in order to liberalize prices for certain basic products, such as sugar, bread and liquid gas for cooking. Nevertheless the government still maintains price controls on some strategic goods and services such as gasoline and medicines. Prices of utilities, including telephone, electricity, and water, are established by the government. Likewise, the Asuncion city government has power to set the price of public transportation. The minimum monthly wage is also fixed by the government.

Tax policy: The current tax system relies primarily on indirect taxes. The proposed FY1991 budget indicates that about 30 percent of estimated central government revenues will be derived from sales and stamp taxes, 22.6 percent from the royalties produced from Itaipu, 13 percent from taxes and duties on imports and exports (mainly imports), 8.3 percent from income taxes (mainly corporate taxes), 1.5 percent from real state taxes, and the remaining from miscellaneous revenue sources. Corporate income is taxed at progressive rates, reaching a maximum rate of 30 percent. The government provides tax incentives for exports of manufactured products. Law No. 90/90, effective December 1990, introduced incentives for the export of manufactured products, including the elimination of export duties and related taxes. Law No. 60/90 established fiscal incentives for domestic and foreign investment providing exemptions from many types of taxes and custom duties for a period of up to five years.

Tax reform: Tax evasion has been widespread in Paraguay. To reduce tax evasion and simplify the current complex and obsolete tax system, in June 1991, the Ministry of Finance presented to the Paraguayan Congress a tax reform proposal. The proposal includes the imposition for the first time of a value-added tax, but does not include the controversial personal income tax.

Regulatory policies: Paraguay does not have significant discriminatory import restrictions such as quotas and other administrative restrictions that may impact negatively on U.S. exports. The government has maintained a two tier import tariff structure. Rates between 5 and 35 usually are designed for revenue generation, rates over 35 percent usually are applied to items competing with goods produced by local manufacturers or to items considered as luxury imports. Currently, the top rate is 70 percent, but this level is rarely applied. Imported goods are not subject to prior licensing. However, foreign goods competing with goods manufactured by local producers may be subject to special treatment such as prohibition or temporary import restriction. A large percentage of U.S. exports to Paraguay is destined for third countries, mainly Brazil and Argentina.

4. Debt Management Policy

The Paraguayan external debt increased substantially between 1976 and 1981. From 1982 until 1987 the foreign debt burden was a serious problem for the Paraguayan economy. During this period the debt servicing ratio was about 92 percent. In 1990 the foreign debt service burden began to decline. In 1990, the servicing of the public debt represented 28.3 percent of total export earnings, and the level of the total external debt represented 29.3 percent of the 1990 GDP.

Paraguay's total external debt amounted to $1,670 million at the end of June 1991. Paraguay's external debt is divided as follows: $638 million (38.2 percent) with the member governments of the Paris Club; $819 million (49 percent) with the multilateral institutions (World Bank, Inter-American Development Bank, other institutions), and $214 million (12.8 percent) with the commercial banks.

The debt structure: Of the $1.67 billion registered external debt approximately 40 percent is held by the central government; 47 percent is owed by public enterprises. Finally, debts of the financial institutions represent 13 percent of the total foreign debt.

In 1989, Paraguay negotiated a rescheduling agreement with its largest creditor, Brazil, whereby Paraguay could service its bilateral debt with the purchase of Brazilian debt on the secondary market. During 1990, Paraguay purchased Brazilian debt at an average discount of 75 percent and thus retired its entire $436 million obligation with Brazil. This operation reduced Paraguay's total foreign debt from about $2.1 billion down to about $1.7 billion. Nevertheless, Paraguay's arrears to other creditors continued to climb, reaching some $460 million by the end of the third quarter of 1991. Meanwhile, the government has been intermittently seeking a standby agreement with the International Monetary Fund (IMF) since 1990. It appears possible that a stand-by arrangement will be negotiated in 1992, if the government of Paraguay makes a decision to do so. Negotiations to reschedule official debt with the Paris Club might begin thereafter.

5. Significant Barriers To U.S. Exports

Although Paraguay is a small country with a relatively small manufacturing sector, it generally has not sought to erect protective trade barriers. In practice, Paraguay's market policies are among the most liberal in the Southern Cone.

Import Licenses Requirements: None are presently imposed on potentially importable items. However, foreign goods competing with goods manufactured by local producers may be subject to special tariff treatment under Paraguayan Law No. 1095/84. Such tariff treatment consists of temporary, prohibitive or restrictive measures to protect or promote the economic and social development of the country, maintain a sound trade balance, or offset dumping of foreign goods. In practice, such import bans most often are imposed on seasonal agricultural products competing with domestic production.

Service Barriers: A regulation from the Ministry of Interior requires that non-Paraguayan owners of guard service firms should have resided a minimum of ten years in Paraguay.

Law Decree No. 26504 dated January 8, 1963 regulates broadcasting services in Paraguay. Article number six establishes the requirements for obtaining authorization to operate commercial broadcasting services. Only Paraguayan nationals are authorized to operate commercial broadcasting stations.

Standards, Testing, Labelling, and Certification: Paraguayan regulations require the identification of the country of origin on domestic and imported products. Goods made in the United States must be marked "Made in the U.S.A." before they are shipped.

Investment Barriers: Paraguay maintains an open door policy to attract foreign investment. Paraguayan laws on foreign investment are among the most liberal in Latin America. In general, foreign investors enjoy all the same rights accorded to Paraguayan nationals and may take advantage of special investment incentive programs. Law 60/90 is the law governing investment. The law sets out legal criteria for the application of investment incentives. The law establishes the principle of national treatment and makes no distinction between foreign and domestic investors.

Government Procurement Practices: Public sector procurement is based on a competitive bidding process. Assuming no more than one firm bids on a particular purchase proposal, the government must call two more bids to attract additional bidders. If no other bidders appear after the third bid, the government agency can authorize the purchase on a noncompetitive basis.

Buy National: Decree No. 31609/82 establishes that in all contracts for the construction of public works projects or for the supply of services to the government preference must be given to local suppliers of domestic goods and services. Such preference in the award of bids and tenders consists of a price differential of up to 15 percent compared to foreign goods and services.

Customs Procedures: Probably the main obstacle to smooth export operations to Paraguay is the cumbersome bureaucratic procedures practiced by local customs. The long delay by customs dispatchers in clearing shipments is as much of a handicap for Paraguayan exporters as to importers, and is not seen as a discriminatory measure against imports.

6. Export Subsidies Policies

Preferential Financing for Major Crops: The central bank provides preferential financing to growers of soybeans, cotton, and wheat. Paraguay's economic activity is highly dependent on the performance of these crops. Exports of soybeans and cotton represent approximately 70 percent of 1990 total export earnings.

Tax Exemption to Encourage and Promote Manufactured Products: The government, through Law No. 90/90, effective December 1990, has introduced incentives for the export of manufactured products that incorporate added value to domestic or imported raw material, using local manpower, services, and energy resources. Consequently, such exports are free from export fees and related taxes. Moreover, imported raw materials used in the production of goods for export are exempted from custom duties and import surcharges.

7. Protection Of U.S. Intellectual Property

Paraguay's chief failure in the area of intellectual property rights is the lack of consistently effective enforcement of the laws in place, although its laws also do not meet U.S. concerns in some areas. Another negative factor is the slow working of the judicial system in issuing timely and clear decisions on trademark infringement cases.

Patents: The Government of Paraguay is in the process of revamping its antiquated patent law. The current legislation states that every new discovery in any type of industry, except pharmaceuticals, whether foreign or domestic, confers upon its author the executive right to fully exploit the discovery for his exclusive gain for a renewable period of 15 years.

In principle, foreign patents must be registered with the office of patents of invention and are subject to the same procedures and fees as national patents. The person applying for the revalidation of a foreign patent, granted by virtue of an international treaty or convention, must mention the country of origin, serial number, date, and duration of the patent issued. The nationality of the owner of a patent or of the person applying for the patent is important, because Article 36 of Law 773 establishes that foreigners are equally entitled to the benefits of the Law, if the laws of the country where their establishments are located, directly or indirectly, provide for reciprocal treatment of Paraguayan patents, or if this equality is granted through diplomatic conventions.

Trademarks: Paraguay is a major regional hub for the import and export of counterfeit goods. From the Far East come large quantities of counterfeit watches, perfumes, other cosmetics and designer clothing. There is also a small amount of local production. While there are a few cases of police enforcement and judicial action against those involved in the counterfeit business, the huge volume of the trade shows that the local authorities have not seriously limited this illicit activity.

Copyrights: Paraguay recently became a signatory to the Berne Convention for the protection of literary and artistic works. However, there is widespread production and trade in pirated video cassette tapes. Nearly all of Paraguay's local video stores rent large numbers of pirated cassettes. Officials appear to turn a blind eye to this practice.

New technologies: The large scale infringement of new technologies is not evident, largely because Paraguay does not have the know-how to absorb these technologies. However, there is widespread piracy of satellite and television signals.

While the presence of counterfeit products is prevalent in Paraguay, most of the bogus products are imitations of Japanese and Europeans goods.

8. Worker Rights

a. Right of Association

Private sector workers are free to form and join unions without government interference. The existing Labor Code does not permit public sector, temporary, or domestic workers to organize. Public sector workers, with few exceptions, continue to experience strong resistance by management to their union activities. Less than five percent of Paraguayan workers are organized.

Government permission to exercise the right to strike is limited by a complex legal process of fact-finding, arbitration and adjudication that can involve delays of several years. In 1991, public sector strikes were prohibited.

Paraguay was reinstated in February to eligibility for trade benefits under the U.S. Generalized System of Preferences (GSP). Paraguay has been denied trade preferences since 1987 for concompliance with the GSP program's International Worker Rights provisions.

b. The Right to Organize and Bargain Collectively.

The right to bargain collectively is recognized in the Labor Code but most employers refuse to enter into such bargaining because no legal sanctions or government pressures exist which oblige them either to recognize duly constituted unions or to bargain with them.

The tactic of firing the leaders of nascent unions, traditionally used by Paraguayan employers, declined somewhat in 1991. However, the firing and harassment of union organizers by the private sector continued. The Stroessner-era Labor Code provides little protection to unions and union leaders. The new Labor Code pending in the Senate at year's end would better protect union orgzniers and impose sanctions against employers who violate worker rights.

c. Prohibition of Forced or Compulsory Labor

Forced labor is prohibited by law, and is not practiced.

d. Minimum Age for Employment of Children

Minors between 15 to 18 years of age can be employed only with parental authorization and can not be employed in dangerous or unhealthy conditions. Children between 12 to 15 years of age may only be employed in a family enterprise, an apprenticeship, or in agriculture. Furthermore, the Labor Code prohibits work by children under 12. However the reality is quite different. There are estimates that more than 25,000 children, many younger than 12, work in the streets of Asuncion and its suburban communities. In rural areas, it is not unusual for children as young as 10 to work beside their parents cutting sugar cane.

e. Acceptable Conditions of Work

The Government establishes a private sector minimum wage, varying according to the region of the country and based on studies of the cost of living prepared by the National Economic Coordinating Committee. The minimum does not apply to all private sector employees; it does not cover domestic servants, for example. It is estimated that 60 to 80 percent of Paraguayan workers earn less than the decreed minimum.

According to the Labor Code, maximum weekly hours are 48 for day work and 42 for night work, with one day of rest. The law provides for an annual bonus of one month's salary. A married women needs her husband's consent to enter into a labor contract, although labor contracts cannot be denied to women who worked prior to marriage.

The Labor Code also governs conditions of safety, hygiene, and comfort. In general, the Government does not effectively enforce the safety and hygiene provisions of the Labor Code, partially due to the lack of inspectors.

f. Rights in Sectors with U.S. Investment

Conditions generally are the same as in other sectors of the economy.

Source: National Trade Data Bank, Agency: U.S. Department of State