Country Listing

Paraguay Table of Contents



Fiscal Policy

In the 1970s, the government pursued cautious fiscal policies and achieved large surpluses on the national accounts, mainly as a result of the vibrant growth in the second half of the decade. By the early 1980s, there were growing demands for increased government expenditure for social programs. By 1983, the first fiscal year (see Glossary) of increased government spending and the first full year of a recession, the government had entered into a significant fiscal crisis as the budget deficit reached nearly 5 percent of GDP (the deficit had been only 1 percent of GDP in 1980). In 1984 the government imposed austere measures to remedy national accounts. Cuts in current expenditures curtailed already meager social and economic programs. In addition, from 1983 to 1986, real wages of government employees were allowed to drop by 37 percent. Capital expenditures were cut back more seriously. Capital expenditures as a percentage of total expenditure dropped from 31 percent in 1984 to 10 percent by 1986. Austerity measures were successful in economic terms, and by 1986 budget deficits were under 1 percent of GDP. In 1986 the government announced a highprofile Adjustment Plan, which continued previous policies of expenditure cutbacks but also proposed more structural changes in fiscal and monetary policies. The most prominent of these was a proposal for the country's first personal income tax. Many observers characterized the plan as mainly rhetorical, however, citing the government's lack of political will to implement many of its proposals.

Despite the government's ability to control budgetary matters, fiscal policy faced two new and growing problems in the 1980s. The first was the poor financial performance of state-owned enterprises. The overall public-sector deficit, which reached 7 percent of GDP in 1986, had swelled in part because of the high operating costs of parastatals (state-owned enterprises), which accounted for 44 percent of the overall deficit in 1986. Rather than continually increasing the price of utilities and the services of parastatals, the government accepted the loss to avoid the inflationary pressures of increasing costs to consumers. This policy, however, was seen by critics as only a stopgap measure, short of more painful structural solutions, such as examining the financial viability of certain parastatals. The second growing fiscal problem in the 1980s directly involved the country's complex exchange-rate system. Created in July 1982, the multitiered system allowed a preferential exchange rate for the imports of certain government-owned companies. It was the Central Bank, however, that forfeited the losses involved in these exchange transactions, which were recorded as part of the overall public-sector deficit. In 1986 Central Bank losses of this kind accounted for nearly half of all the public sector's deficit. Again to avoid inflation, the government chose to maintain the multitiered system, at least in the short run.

Data as of December 1988