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Paraguay ECONOMIC POLICY
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
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