ࡱ> @ ǶbjbjFF ~,,%4"hL"j7,p< 77777778R:7i "i i 7q`$7QQQi . 7Qi  7QQ2#!, 0o< +.-4 :70j7+.;1 ;\!,"";!,9 Qg99977""@Y,#.""YWorld Trade OrganizationRESTRICTED DOCPROPERTY "Symbol1" WT/TPR/G/146 31 March 2005 (05-1272)Trade Policy Review BodyOriginal: English TRADE POLICY REVIEW  DOCPROPERTY "Country" Paraguay Report by Paraguay  Pursuant to the Agreement Establishing the Trade Policy Review Mechanism (Annex 3 of the Marrakesh Agreement Establishing the World Trade Organization), the policy statement by  DOCPROPERTY "Country"Paraguay is attached.  ADVANCE \y 700  Note: This report is subject to restricted circulation and press embargo until the end of the meeting of the Trade Policy Review Body on DOCPROPERTY "Country"Paraguay. CONTENTS Page  TOC \o "1-6" I. introduction  PAGEREF _Toc100720725 \h 4 II. main economic reforms  PAGEREF _Toc100720726 \h 4 III. the economic and trade environment  PAGEREF _Toc100720727 \h 5 IV. CURRENT ECONOMIC OUTLOOK  PAGEREF _Toc100720728 \h 6 V. DEVELOPMENT OF TRADE NEGOTIATIONS  PAGEREF _Toc100720729 \h 7 VI. institutional and policy framework  PAGEREF _Toc100720730 \h 10 VII. directions of future policy  PAGEREF _Toc100720731 \h 13  introduction Paraguay's economic situation improved significantly following years of economic stagnation and periodic crises. The Government elected in 2003 embarked on an ambitious economic reform programme, focusing on strategies aimed at: restoring the sustainability of fiscal accounts, settling arrears in external and internal public debt payments, improving the efficiency of the public sector, strengthening the financial system, maintaining consistent macroeconomic policies with low and stable long-term inflation, improving governance, and tackling corruption head on. In order to guide and to unify its stabilization efforts and reforms, the new Government of Paraguay concluded a stand-by agreement with the International Monetary Fund (IMF) in 2003 for 2004, which was extended to September 2005. Looking back, it can be said that the Paraguayan economy is beginning to emerge from a long period of weak growth during which macroeconomic administration combined with various structural problems prevented the economy from developing more successfully and increased its vulnerability to negative external shocks. The environment for economic reform improved, and the economy was stabilized in 2004. This was reflected in the performance of the gross domestic product (GDP), which grew by 2.9 per cent in 2004, and the substantial decrease in the level of inflation, which fell to a mere 2.8 per cent. International reserves reached a historical record, the fiscal accounts produced a surplus, and there were no domestic or external debt arrears with local or international creditors. Thanks to the substantial increase in tax revenue and the tax surplus, it was possible to reduce external indebtedness by 5 per cent in 2004, and thus to re-establish financial relations with the country's creditors, to stabilize the economy, and to lay the foundations for more sustainable economic growth. The political environment was conducive to improved economic performance. On the one hand, the Executive had been able to improve the country's governance and restore a minimum of credibility to government actions. The firm leadership of the Executive on the anti-corruption front, its steady support for the Economic Cabinet, and a renewed vision of Paraguay's role in the international community were key factors in achieving these results. At the same time, the main political parties represented in the National Congress backed the economic reform proposals tabled by the Executive with a view to drawing up a programme aimed at medium- and long-term growth and sustainable development. The international economic climate also contributed to these results. For example, the economies of the member countries of the Southern Common Market (MERCOSUR) grew by more than 5 per cent in 2004, the prices of the country's export commodities were reasonable, and international interest rates remained low. The world financial situation was conducive to the flow of capital to the region making it possible, among other factors, to accumulate international reserves. main economic reforms The current Government has undertaken a major reform of the country's main economic laws. In that context, it has promulgated the following legislation to date: Law No. 2.421 (Administrative Reorganization and Fiscal Adjustment) of 25June2004; Law No. 2.422 (Customs Code) of 5 July 2004; Law No. 2.051 (Government Procurement) of 21 January 2003; Law No. 2.345 (Fiscal Budget) of 24 December 2003. The National Congress is currently studying proposals by the Executive for the reform of the public banking system and the reform of the banking law. The four laws already promulgated aim to restore the sustainability of fiscal accounts, while the two proposals currently in Congress aim to strengthen the financial system. In keeping with a policy of enhancing the competitiveness of Paraguay's productive sector, a number of important decisions have been taken with a view to opening up trade in goods from sectors that are crucial to the development of the country's productive activity. On the one hand, tariff protection of capital goods and information technology and telecommunications goods, to mention only the most important cases, was considerably reduced. At the same time, in the meat production sector, which has recently recorded the highest growth rate among the country's exports, Paraguay has acquired the international status of country free of foot-and-mouth disease with vaccination, enabling it to recover important traditional markets and to acquire others. Different steps have also been taken to improve the efficiency and transparency of the public sector. These have included independent audits of State enterprises, better dissemination of statements of condition of government agencies and enterprises, and demands for a plan to study the feasibility of private sector participation in their capitalization. Government efforts to enhance the efficiency and transparency of public sector management and to reform the priority economic sectors are beginning to produce results which, in turn, will contribute to the sustainability of long-term growth. the economic and trade environment The Government has introduced a number of economic adjustment measures which have brought stability and provided a cushion against negative external shocks. Initially, these measures focused on reversing the deterioration of the public sector's financial situation. As a result, the fiscal situation improved considerably, and according to preliminary figures, the central government collected more than it spent in 2004, achieving a surplus of approximately 1.7 per cent of GDP, while public enterprises, helped by the exchange rate stability, improved their performance. This would mean that the consolidated public sector had achieved a surplus of 2.7 per cent of GDP, reflecting a significant growth in revenue thanks to the improved administrative management of the main tax collection agencies, the review of controlled prices and rates, and the moderate growth in current expenditure. Public indebtedness is at a prudential and sustainable level: no arrears are owed to either international or local creditors. The substantial arrears in both the internal and external medium- and long-term public debt that remained at the beginning of the 2003 administration have been fully settled. In the case of the external debt, the arrears in payment went from US$97.4 million to zero, while overdue and unpaid local debt service went from US$30 million to zero. As regards monetary policy, demand for local currency increased, and is expected to continue to do so, enabling the Central Bank to pursue a monetary policy that can stimulate economic recovery without feeding inflation. The interest rate of the debt instruments used by the Central Bank to influence the quantity of money was substantially reduced, from an annual weighted average of 16per cent in 2003 to the current 7 per cent. Interest rates on the local currency loans market were also reduced. At the same time, the international reserve targets set in connection with the standby agreement with the IMF were fully achieved, and international reserves reached a historical peak at close to 20 per cent of GDP. Paraguay's monetary policy has enabled economic growth in 2004 to take place against a backdrop of price stability. Inflation was down to 2.8 per cent at the end of the year as compared to 14.6 per cent in 2002 and 9.3 per cent in 2003. Paraguay's foreign trade reached its peak in 1997, both in terms of exports and imports, before entering a downward trend in 1998 to reach its lowest levels in 2002. This trend, particularly in imports, is partly explained by the decline in domestic demand as a result of the financial crisis during those years, which limited domestic credit. At the same time, exports decreased between 1999 and 2002 owing, inter alia, to the decline in the competitiveness of domestic supply as a result of the devaluation of the Brazilian and Argentine currencies and to the region's financial problems. Starting in 2003, exports and imports recovered significantly, with growth rates in 2004 of 31 per cent and 42per cent respectively in comparison to 2003. As a result of this growth, the openness ratio reached its historical peak of 63.1 per cent, as compared to 44.2 per cent in 1997. Total exports, including re-exports, reached US$2,872,000,000, close to the 1998 level prior to the devaluation of the Brazilian Real. Meanwhile, imports reached US$3,245,000,000. The trade account imbalance is structural, and is compensated by a positive flow in the services account of US$230,000,000, thanks chiefly to royalties from Itaip and Yacyret. Paraguayan exports are concentrated in the high productivity sectors in which the country has a competitive advantage, such as the soya and beef complexes. In 2004, the most dynamic export growth component was meat which rose from US$61,000,000 in 2003 to US$161,000,000 followed by soya flour, soya bean seed, and cotton fibre, which rose by 67 per cent, 11.4 per cent, and 87 per cent respectively. The exchange rate remained stable throughout 2004, with a slight nominal depreciation against the US dollar of 3.6 per cent. This contrasted significantly with most of the countries in the region, where the appreciation of the local currency against the dollar followed the appreciation of the Euro. The real effective exchange rate depreciated substantially by about 16 per cent in 2004 as a result of the appreciation of the Brazilian Real against the US dollar. The financial system improved: deposits recovered from the sharp decline of 2002 in the wake of a banking crisis linked to the regional crisis, and have pursued their recovery ever since. Local currency credits, unlike foreign currency credits, are beginning to show signs of recovery. Total deposits in the private banking system have grown by 12.4 per cent over the past year, while credits have grown by 16 per cent. This has produced, as a side effect, an incipient process of secondary money creation by the sector which is beginning to alter the conditions that have prevailed since the end of 2002, when deposits in the banking system began to exceed credit levels, resulting in practice in a decrease in liquidity on the market. CURRENT ECONOMIC OUTLOOK Paraguay's economic outlook has improved considerably. In a short period of time, the current government has implemented prudent fiscal and monetary policies that have succeeded in stabilizing the economy. As mentioned, there has been a significant improvement in public finances, and relations with local and international creditors have been normalized. And with inflation under control, the country's external competitiveness has improved. With the current structural reform process now under way, Paraguay's medium-term economic outlook is better than it was. The regional economic environment has improved, and conditions are now favourable for Paraguay's main trading partners. Performance is nevertheless expected to pursue its recovery, and GDP growth to become more sustainable. The favourable evolution of GDP in the medium term will depend largely on the maintenance of prudent fiscal and monetary policies such as those already introduced, together with strong public policies, and further structural reform. It will also be essential for the country to boost its entrepreneurial and labour productivity. The Paraguayan Government considers that its contribution should include the privatization or capitalization of public enterprises, reform of the social security systems, a systematic and systemic combat against corruption and informal activities, and the implementation and follow-up of education and health programmes which, in their turn, should help to improve the human capital, to incorporate more advanced technology in cooperation with the private sector, and to foster investment in basic infrastructure for economic activities. The government is convinced that this will require a prolonged and continuous effort on its part. DEVELOPMENT OF TRADE NEGOTIATIONS Paraguay's participation in the various international trade negotiation forums is geared towards securing and expanding markets for its exportable supply, attracting investment, and participating actively in cooperation and technical assistance programmes aimed at achieving effective and equitable integration in international trade. World Trade Organization (ϲʹ) The Paraguayan Government has increasingly turned its attention to ϲʹ issues over the past few years, in particular since the launching of the multilateral trade negotiations in Doha. It considers the strengthening of multilaterialism to be crucial to its economic growth and development goals. Consequently, Paraguay has adopted a more active role in the ϲʹ's decision-making process by submitting proposals in the areas covered by the Doha Development Agenda, both individually and as part of MERCOSUR, the G-20, the Cairns Group, and the Colorado Group, or together with other developing countries with small and vulnerable economies. The Government of Paraguay has stressed its firm commitment to the Doha mandate. Its main concerns in the current round of negotiations are agriculture, trade facilitation, special and differential treatment for developing countries, as well as development issues and the programme for small economies mentioned in paragraph 35 of the Doha Declaration. The ϲʹ reform of trade in agricultural products, whose objective is to establish an equitable and market-oriented system of agricultural trade, is fundamental for Paraguay. As already mentioned, Paraguay's main exports rely on its agricultural potential. Its economy is highly dependent on agricultural production, which provides sustenance to much of its population. The elimination of trade-distorting measures in this sector would provide all countries, in particular the developing countries, with fair and equitable rules that would favour their participation in world trade. Since the ϲʹ General Council Decision of July 2004, Paraguay has been participating actively in the Sub-Committee on Cotton, an agricultural sector that is of vital importance to the country's social and economic development. At the same time, special and differential treatment for the small and vulnerable economies and progress in the negotiations on trade facilitation are also crucial to Paraguay's foreign policy, and are raised in all of the international negotiations to which Paraguay is a party. Because of its geographical situation, Paraguay has high transport costs for the import and export of goods, and these costs are detrimental to the competitiveness of its domestic production. Improved customs and port procedures at home and in the transit countries and a more efficient transport infrastructure are essential to overcoming this obstacle. Paraguay would like to see progress in the negotiations in both groups to which it has submitted proposals, both individually and jointly. As regards the dispute settlement mechanism, Paraguay has participated as a third party in many disputes, relating chiefly to trade in agricultural products, and special and differential treatment. It also hopes that the reforms to be made to the multilateral framework will succeed in producing a flexible and efficient instrument, above all one that is accessible to the developing countries. Although Paraguay tends to focus its attention on the above-mentioned areas, it is equally ambitious when it comes to any of the current negotiations under the ϲʹ or other forums that seek to promote genuine openness, the deepening of trade relations, and trade competition. MERCOSUR MERCOSUR continues to be the main destination of Paraguay's exports and the main origin of its imports. Indeed, this has been true ever since the elimination of tariffs within the zone which gave rise to the expanded market about halfway through the 1990's. Between 1997 and 2004, exports to MERCOSUR accounted for 54 per cent on average of the total, while imports from MERCOSUR accounted for 55 per cent of the total. Starting in 2001, there were signs that Paraguay's export markets were beginning to diversify, particularly with sales to Asia, Africa, and the Middle East. Although Paraguay has attracted relatively little in the way of foreign investment in comparison to its MERCOSUR partners, the government considers that global integration is the right way to make the most of the advantages associated with larger markets, and it is convinced that it must continue along the path of economic, political, and cultural integration. Paraguay's tariff policy has consisted in applying low and uniform customs duties. The weighted average import duty applied to goods originating outside the MERCOSUR zone decreased from 5.9 per cent in 1995 to 4.1 per cent in 2003, in keeping with Paraguay's historical policy of openness to the international community of nations. The special agreements concluded in the framework of MERCOSUR, which permit the maintenance of tariffs exempted from the MERCOSUR Common External Tariff, have been a fundamental part of this policy.  SHAPE \* MERGEFORMAT  Note: APPI: Weighted average tariff for imports from within the zone; APPE: Weighted average tariff for imports from outside the zone; APP: Weighted average tariff for total imports. Source: Ministry of Finance. With respect to common trade policy, starting in December 2003 Paraguay made important gains at the MERCOSUR level. The treatment of asymmetries in MERCOSUR enabled Paraguay to consolidate a set of measures aimed at balancing its participation in the integration project. These gains include the following decisions of the MERCOSUR Common Market Council: Dec. CMCNo.27/03 on structural funds to enhance the competitiveness of the smaller partners and least-developed regions; Dec. CMC No.28/03 on differential treatment in external negotiations for Paraguay as a smaller economy and land-locked country; Dec.CMC No.29/03 on MERCOSUR rules of origin; Dec. CMC No.31/03 on the Common External Tariff; Dec. CMC No.32/03 on special import regimes; Dec. CMC No.33/03 on information technology and telecommunications goods; and Dec. CMC No.34/03 on capital goods. The MERCOSUR integration project is the most important component of Paraguay's trade policy strategy. It is therefore essential that the project should be strengthened and deepened through an approach that fosters effective access to the regional market, free from tariff and non-tariff barriers, and that would guarantee the free circulation of goods and services. Also worth mentioning is the reform of the MERCOSUR dispute settlement system through the Protocol of Olivos, which provides for the creation of a permanent review tribunal. This tribunal has been set up in Asuncin. Paraguay has what is already a long tradition of openness to international trade. For the past few years, its trade negotiation strategy with other countries and blocs has passed via MERCOSUR. In that framework, it has concluded agreements of various degrees of complementarity and cooperation with the European Union, the countries of the region, South Africa, and India, to name but a few. It is also negotiating the Free Trade Area of the Americas (FTAA). The basic approach of these strategies has been to promote a freer environment for international trade and investment. Applying the "four plus one" format, MERCOSUR is involved in various negotiations with other countries of the region and outside the hemisphere. In all of these negotiations, Paraguay is seeking access to markets through special and differential treatment in view of its status as a relatively less economically developed and land-locked country. MERCOSUR has undertaken to negotiate jointly trade agreements with third countries or groups of countries outside the zone which involve the granting of trade preferences. MERCOSUR and regional agreements As a MERCOSUR member, Paraguay concluded Economic Complementarity AgreementNo.35 with Chile, and Economic Complementarity Agreement No.36 with Bolivia, for the creation of a free trade zone between them. In December 2003, MERCOSUR signed with Peru, Colombia, Ecuador and Venezuela Economic Complementarity Agreements Nos. 58 and 59, which target the establishment of a free trade zone within an average of 15 years. Paraguay is also taking part in the efforts to create the FTAA. MERCOSUR and extra-regional agreements Paraguay is currently participating, with the other MERCOSUR members, in drawing up an inter-regional association agreement with the European Union with a view to establishing a political, economic and cooperation association, based on the EU-MERCOSUR Interregional Framework Cooperation Agreement. Together with the other countries of MERCOSUR, Paraguay concluded framework trade agreements with: India (June 2003), South Africa (December 2004), Egypt (July 2004), and Morocco (November 2004). It also signed agreements on fixed preferences with India and the Southern African Customs Union (SACU) (December 2004), and is negotiating similar agreements with Egypt and Morocco. institutional and policy framework Trade defence Paraguay's legislation regulating anti-dumping measures and on subsidies and countervailing measures comprises the ϲʹ Agreement on Implementation of Article VI of the GATT 1994 and the ϲʹ Agreement on Subsidies and Countervailing Measures, incorporated into domestic legislation by Law No.444/94. Decree No.15.286/96 designates the Ministry of Industry and Trade and the Ministry of Finance as the agencies responsible for their application, and establishes relevant administrative procedures. Intellectual property Paraguay's constitution, which has been in force since 1992, explicitly guarantees intellectual property rights. Article 110 of the Constitution stipulates that every author, inventor, producer or trader shall enjoy exclusive ownership of his work, invention, mark or trade name in accordance with the law. Paraguay is a member of the World Intellectual Property Organization (WIPO) and has ratified a number of international conventions on intellectual property rights (IPRs). The new Law on Patents introduced the possibility of granting patents to sectors that had previously received no protection at all, such as pharmaceutical products. Law No.1.630 of 2000 provided for pharmaceutical patent protection as from 1 January 2003, but this date was later put back to 1 January 2005 by Law No.2.047 of 19 December 2002 in accordance with Article 65 of the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS). Up until 1January2005, it was possible to file a patent application (Article 91 of the Law on Patents) under the "mailbox" procedure provided for in Article 70 of the TRIPS Agreement. It was also possible to obtain exclusive marketing rights under Article 94 of the Law on Patents. The dates of such applications are valid for future priority-related claims. Considerable efforts have been made to improve enforcement of IPRs. Since its last trade policy review in 1997, the Government of Paraguay has stepped up its searches and seizures in cases of violation of these rights within its territory. In connection with the review of its IPR legislation in the TRIPS Council in November 2000, Paraguay provided statistics testifying to its IPR enforcement efforts during the period 1998-2000. Defence of competition and the consumer While the Paraguayan Constitution of 1992 guarantees free market competition in Paraguay and prohibits the establishment of monopolies, no specific competition law has yet been adopted to serve as a detailed legal framework for dealing with monopolistic practices. However, the Traders' Law contains a few general guidelines concerning market competition. The authorities noted that the lack of specific regulations governing competition does not mean that the provisions of the National Constitution do not apply; indeed, the Constitution itself stipulates that the lack of a regulatory law may not be invoked to deny constitutional rights or guarantees. In 2003, a draft law on the defence of competition was submitted by the Executive to the National Congress for consideration, and it is currently under review. This draft sets forth what is considered to be permissible competitive conduct, including the possible capture of markets on the basis of superior efficiency alone. Paraguayan-owned companies domiciled outside of Paraguay will be subject to the provisions of the draft law to the extent that their activities have an impact on domestic economic activity. The draft law also allows the conclusion between companies of agreements that result in an improvement in the standard of living of poor areas, better quality of services, and increased exports, provided they are not detrimental to market competition. Law No.1.334 on Defence of the Consumer and User was enacted in 1998. Ministry of Industry and Trade (MIC) Resolution No.394 of 31 December 1997 provided for the creation of the General Directorate of Consumer Protection, which is answerable to the Under-Secretariat of State for Trade of the MIC, to deal with claims and complaints and provide information and guidance to citizens in the area of protection of consumers' and users' rights. The MIC also administers the Enhanced Consumer Protection Programme, which reinforces the Integrated National Consumer Protection System (SNIPC) set up by Decree No.20.572 of 10 March 2003, with a view to providing, at the national level, information, guidance, conciliation, mediation, arbitration, investigation, inspection and dispute settlement services for consumers under Law No.1.334/98. The SNIPC includes the MIC as the authority in charge of implementing, at the national level, Law No.1.334/98, while the municipalities are responsible at the local level. Customs regime Improvements to the structure of the customs system have made it possible to progress considerably in the area of customs procedures by introducing cross-check systems (computerized) with the transit countries, given that Paraguay is a land-locked country. In addition, the integrated control areas have been completed, and trade flows have been directed towards border crossings that are equipped for the legal entry of goods into the country. A satellite system is currently under construction for the control of river and land transit of goods. External trade control procedures have been rendered more effective thanks to the rehabilitation of private ports and the upgrading of national ports. The National Customs Directorate is the institution responsible for administering import procedures. These procedures are set forth in the Customs Code (Law No. 2.422 of 5 July 2004) which entered into force on 11 January 2005, replacing the previous code (Law No. 1.173/85). The National Customs Directorate controls imported products through the use of different channels. The new Customs Code incorporates the channel system and defines the channels explicitly. Decree No. 13.721, notified to the ϲʹ in 2004, establishes supplementary regulations to Laws Nos. 260/93 and 444/94, by which the ϲʹ Agreement on Customs Valuation was ratified and declared to be the applicable standard for establishing the customs value of imports. Moreover, the new Customs Code (Law No. 2.422) introduces a special reference, in Article 261, to international agreements and the regulations thereto, which are to taken into account when examining the Value Declaration. Export procedures are set forth in the Customs Code (Law No. 2.422), which stipulates that all exporters be registered in the National Exporter Documentation Register (RNE) regulated by Decree4.672/05. Exporters that have registered their companies through the computerized system SOFIA are exempted from this requirement, and their registration remains valid until April 2005. From April onwards, registration in the RNE will be mandatory. Government procurement Law No. 2.051 of 21 January 2003 (Law on Government Procurement LCP), regulated by Decree No. 21.909 of 11 August 2003, establishes the statutory provisions governing all public procurement in Paraguay. Implementation of the Law on Government Procurement, and essentially of the procurement portal, altered the way in which procurement takes place in Paraguay. The main changes involve the establishment of a single legal framework for all agencies, giving greater security to suppliers and facilitating their participation. Standard tender documents also contribute to that objective. Access to information not only on procurement, but in other areas as well, has made it easier to exercise control: in this case, control of what the government plans to purchase, what it actually does purchase, how much it pays and from whom the purchase is made. A reduction in the time needed to pay the supplier has also encouraged participation by enterprises in the tendering procedures, essentially helping the small enterprises. Greater participation clearly means greater competition, and hence lower procurement costs for the State. Depending on the domain, costs have decreased by 20 to 30 per cent. While in some areas, such as fuels, costs have increased owing to the market situation, in others, for example medicaments, they have decreased by almost 40 per cent. Another important element is the simplicity of citizen control, which is in fact beneficial to the State as a whole. The transparency of procedures enhances the country's credibility, not only with taxpayers and suppliers, but also with international financial institutions. Agriculture Creation of new entities for animal health and plant health The Paraguayan government is currently introducing changes in the organization and operational structure of the Ministry of Agriculture and Livestock (MAG), the main public body in the agricultural sector, in order to improve the efficiency with which it fulfils its basic roles and so that it can respond to the current and future realities of the agricultural sector. As a part of this process, two new entities were recently created with legal personality under public law, independent and with their own resources: the National Animal Quality and Health Service (SENACSA) and the National Plant and Seed Quality and Health Service (SENAVE), which replace operational units that existed within the structure of the MAG. The National Animal Quality and Health Service was created on 28 July 2004 by Law No.2.426, which unifies the official veterinary services, bringing together in one single entity all that concerns animal health, quality, and safety of food of animal origin, and international trade in animals and animal products, making it possible to supervise and control every phase of the production chain. SENAVE was created by Law No. 2.459 of 4 October 2004. Its main function will be to implement national policy in the area of plant health and quality, seed production, and the protection of new plant varieties and plant products derived from biotechnology. directions of future policy The Government of Paraguay believes firmly in free international trade, and relies on the multilateral trade rules and their capacity to provide an ideal framework for the generation and development of productive activities. It will therefore continue to seek further economic integration in MERCOSUR and to participate actively in the negotiations under the ϲʹ, in particular as regards the Doha mandate, the Development Round, and the so-called "July Package", with a view to establishing concrete and credible arrangements to ensure that the developing and least-developed countries are able to participate in international trade and investment on an equitable basis. The Government of Paraguay attaches great importance to agriculture and to the three pillars of the multilateral agricultural negotiations (market access, export subsidies, and domestic support) in achieving true liberalization and reform of the agricultural market, and to special and differential treatment for the land-locked developing countries with small and vulnerable economies. Progress in opening up the agricultural sector to truly competitive conditions is crucial to the success of the Development Round. Paraguay is working closely with its counterparts from the G20 countries and the Cairns Group, and with all interested parties, to ensure that the Round produces balanced and mutually compatible results in all sectors. It would be an advantage for all ϲʹ Members to complete the work on the negotiating modalities prior to the next ministerial meeting in Hong Kong. Paraguay's agricultural economy is one of the most open in Latin America, although it is small and relies on an export production model focussed on a few agricultural products. State intervention in agricultural policy is confined to a few instruments: reference prices are occasionally established for certain products, but have no great budgetary impact. There are no guaranteed minimum prices requiring government procurement, nor are there any price bands. Indeed, Paraguay does not even have any "exchanges" devoted to the marketing of agricultural products. The only specific cases of State intervention in the form of permitted domestic support - i.e. "green box" - in the area of general services and food security and aid programmes, apart from certain sporadic development measures, are geared towards assisting small producers in emergency situations arising from adverse climatic and economic conditions. As regards the manufacturing sector, the Paraguayan Government will continue its efforts to improve the business climate and ensure conditions conducive to production, and to strengthen the export agro-industry and technology-based industries. These will be developed chiefly in order to promote the development of small and medium industries so that they can contribute to strengthening the Paraguayan industrial fabric and generate permanent jobs. In the energy sector, a complete evaluation was also made of the State oil company and the system of regulation of the petroleum-based fuels sector, and a draft law was produced with a view to completely redefining the sector. The reform planned by the Government would open up the industry to competition, create a regulatory body for the sector, and eliminate the price subsidies hitherto applied. As regards electricity, Congress is currently examining a draft law which calls for independent production, including cogeneration or self-generation of electricity. As regards the financial system, 2004 was a period of consolidation and gradual recovery of the private banking system, which saw its solvency level improve, its profits increase, and its portfolio risk profile improve. This improvement in the risk and solvency indicators was chiefly due to: (a)portfolio rehabilitation together with greater rigour on the part of the banks in their credit analysis; (b) an increase in the level of reserves. Thanks to this policy, the portfolio deterioration indicator for private sector banks decreased from 15 per cent in December 2003 to 6 per cent in December 2004. Increased solidity, coupled with improved risk indicators and high liquidity, should ensure that the credit recovery process that began at the end of 2004 will last. At the same time, the greater solidity of the banking system provides a guarantee that the financial sector will be able to face adverse economic cycles in the future. In the second five-year period, GDP grew on average by 0.7 per cent annually, a rate which is somewhat disappointing in comparison to the first years of the 1990s. However, its growth was impeded by the deterioration in the terms of trade, the lack of reforms aimed at altering the structure and productivity of the economy, and the severe financial crises that emerged as of the middle of 1995. One lesson that Paraguay learned from this experience is that financial markets must be very well regulated in order to function well throughout the entire economic cycle. Economic growth can hardly be expected to be sustainable in the long term unless it can rely on solid financial systems. Another lesson is that sustainable growth can only take place if the economy develops broad productivity patterns, which presupposes the incorporation of state-of-the-art technologies in a number of economic sectors. Dependency on one or two key sectors is a serious threat to the sustainability of economic growth. Historically, Paraguay has been a country of moderate inflation. Indeed, it was a haven of stability in the inflationary context of Latin America in the 1970s and 1980s. While a number of countries in the region changed their currencies several times in response to the situation, Paraguay, in contrast, has maintained the Guaran as its national currency since 1947. More recently, however, the countries in the region have focussed their efforts on ensuring greater macroeconomic stability, a key factor in the sustainability of long-term growth. Paraguay's economy being very open, greater regional stability produces lower inflation rates at home. Also crucial in 2003 were the low international interest rates and the appreciation of the US dollar, which generated conditions that were conducive to a change in local savings portfolios and to an increase in the share of domestic currency savings. The positive side of the disinflation that took place from 2003 onwards is that it was achieved with a looser monetary policy characterized by lower domestic interest rates, a policy which, in its turn, led to a recovery of private sector credit, which had declined sharply since 2002 in the wake of the regional financial crisis. The fact that the fiscal sector had been stabilized and was generating a surplus in 2003 was undoubtedly also an important internal factor. In the case of Paraguay, the unemployment rate is essentially determined by factors extraneous to the economic cycle, so that monetary policy has no decisive influence on that variable. Employment is essentially determined by factors linked to the structure of the economy, in particular its level of development and productivity, as well as factors relating to poverty and social exclusion, health hazards, technical production capacity, and levels of education. Thus, it would appear that monetary policy in developing countries tends to have a more neutral impact on employment levels, in contrast to what takes place in the more industrialized markets and countries. The commitment by the monetary authorities to achieve low and stable inflation in the medium and long term is consistent with less volatility in the employment rate and more sustainable growth. The Government's target is to keep the annual inflation rate within the 3 to 5 per cent range, because it considers this to be the best way of ensuring that long-term growth is as sustainable as possible. With the exception of a few isolated periods, Paraguay's fiscal policy has not resulted in any major imbalances. Since the adoption of the current charter of the Central Bank in 1995, the Government can no longer finance itself by issuing currency, and as a result, monetary policy is highly independent. This independence is often more practical than legal in nature, and the Central Bank of Paraguay has what can already be described as an organizational tradition of independence in its leading decisions. This obviously does not mean that there is no need for monetary policy to be coordinated with Government policy. Indeed, this coordination is a key to long-term macroeconomic stability. In our view, the main challenge facing Paraguay's economy over the next decades will be to boost its productivity, both in the sectors in which the country has advantages and in the sectors where it currently has none. Without this broad growth in productivity, the economy cannot achieve sustained growth. This is a fundamental challenge for enterprises, for the private sector, and for scientists. Indeed, it is difficult to imagine what the economic growth of companies following the industrial revolution would have been without the incorporation of science and technology in productive activities. It is essential that the Paraguayan economy prepare to compete in a more globalized environment. The globalization of the economy will progress during the coming decades. At the same time, the challenge of governance and good public policy will remain for some time to come. We must step up our efforts to restore the credibility of State institutions and enhance their efficiency. An efficient State goes hand in hand with the smooth functioning of markets and of the economy. ANNEX 1 Statistical Appendix Selected economic indicators (Annual percentage variation) 1998199920002001200220032004aReal sector and pricesGDP growth-0.40.5-0.42.7-2.32.62.9Annual inflation (average)11.66.89.07.310.514.24.3Annual inflation (end of period)14.65.48.68.414.69.32.8Guaran/US$ variation (end of period, per cent)20.313.75.932.751.7-15.83.5External sector (US$ millions)Exports 3,5442,3072,3221,8831,8522,2112,872Imports3,9412,7502,8642,5002,1342,4833,245Trade account-396-443-541-618-283-271-372Current account-160-165-163-2669413252Capital and financial account325527196168102263-35Balance of international reserves (US$ millions)8759887727236419831,168Public sector (as percentage of GDP)Central government balance-0.9-3.6-4.3-1.1-3.0-0.51.7Consolidated public sector balance0.3-2.9-3.70.1-3.10.02.7Medium- and long-term external public debt (US$millions)1,5992,1122,2342,1622,2832,4782,358Monetary sectorMonetary base8.57.6-1.55.7-1.557.817.3M17.49.417.89.01.038.924.2M2-2.810.93.26.4-3.829.824.0Interest rate of treasury bills (weighted average)24.819.610.319.925.615.56.6Financial sectorCredits granted by the financial system-2.810.63.213.20.2-25.216.0Deposits in the financial system8.319.86.122.3-1.79.112.4Lending rate in Guaranes49.545.342.844.950.550.033.5Borrowing rate in Guaranes6.88.79.79.312.310.22.7a The figures for 2004 are preliminary. Source: Central Bank of Paraguay. Ministry of Finance. __________  Define as the ratio of imports and exports to GDP, expressed as a percentage.  Subsequently joined by the other members of the Southern African Customs Union (SACU), namely Botswana, Lesotho, Namibia and Swaziland.  Law No. 1.173/85, of 17 December 1985. 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