Country Listing

Paraguay Table of Contents


Monetary Policy

In 1943 the guaraní (see Glossary) replaced the gold peso (which had been pegged to the Argentine peso) as the national currency, laying the foundation for the country's contemporary monetary system. Guaraníes are issued exclusively by the Central Bank (Banco Central) in notes of 1, 10, 100, 500, 1,000, 5,000 and 10,000 and as coins of 1, 5, 10, and 50 guaraníes. One guaraní is worth 100 céntimos.

Changes in banking laws in the 1940s set the stage for the creation of the county's new Central Bank, which was established in 1952, replacing the Bank of Paraguay and the earlier Bank of the Republic. As the center of the financial system, the Central Bank was charged with regulating credit, promoting economic activity, controlling inflation, and issuing currency. As a result of the growth in the financial system, a new general banking law was introduced in 1973, authorizing greater Central Bank regulation of commercial banks, mortgage banks, investment banks, savings and loans, finance companies, and development finance institutions, among others. In 1979 the Central Bank also began to regulate the nations' growing capital markets.

The Central Bank also controlled monetary policy. One of the major aims of monetary policy in the 1980s was price stability. After experiencing extreme price instability--a familiar threat to the economies of the Southern Cone--in the 1940s and 1950s, Paraguay entered into two decades of price stability, credit expansion, economic growth, and a stable exchange rate. Inflation was only 38 percent in the 1960s, a dramatic turnaround from the 1,387-percent figure recorded during the previous decade. Although the rate climbed to 240 percent in the 1970s, it remained far below the postwar level. The pace of inflation accelerated in the 1980s, however, after the economic downturn in 1982. Inflation, as measured by Paraguay's consumer price index, reached an annual rate of 27 percent in 1986 and climbed to well over 30 percent in 1987. Government authorities wrestled with how to control inflation without implementing policies that could unleash even greater inflation and popular discontent. Although influenced by many factors, inflation in the 1980s was exacerbated by fiscal deficits, exchange-rate losses of the Central Bank, the exchange-rate system in general, the country's declining terms of trade, and the inflation of neighboring trading partners, Brazil and Argentina.

The Central Bank regulated the allocation of credit, the supply of credit, and the country's interest rate in an attempt to promote economic growth and restrain inflation. The Central Bank held considerable control over the national banking system, but many regulations were loosely enforced.

Data as of December 1988