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Paraguay Exchange-Rate Policy
From 1960 to 1982, Paraguay enjoyed extraordinary exchange-rate
stability as the guaraní remained pegged to the United States
dollar at g126=US$1. After the virtual financial chaos of 1947-54,
this stability was especially welcome in Paraguay. Although the
country's exchange rate was overvalued in the 1970s, it was not
until the 1982 recession that the government devalued the guaraní.
Exchange-rate policy in the 1980s came to be characterized by
numerous devaluations and almost annual changes in the number of
exchange rates employed. In early 1988 five exchange rates were in
use, making exchange-rate policy very complicated. The first rate
of g240=US$1 was used for the imports of certain state-owned
enterprises and for external debt service payments. The second rate
of g320=US$1 was applied to petroleum imports and petroleum
derivatives. The third rate of g400=US$1 was reserved for
disbursements of loans to the public sector. The fourth rate of
g550=US$1 was used for agricultural inputs and most exports. The
fifth rate, the only one not set by the Central Bank, was a freemarket rate set by the commercial banks. The free-market rate,
which was applied to most of the private sector's nonoil imports,
exceeded g900=US$1 by 1988. Exchange-rate adjustments were expected
to continue in the late 1980s.
One of the most distinctive and complex features of the nation's
exchange-rate policy was a system of official minimum export prices
for selected agricultural commodities. The system, called Aforo,
was essentially a way of guaranteeing foreign-exchange earnings to
the Central Bank. Aforo values, assessed by the government
immediately before a harvest or slaughter, designated the minimum
prices exporters should receive for the goods and determined what
percentage of foreign-exchange earnings must be turned over to the
Central Bank. The difference between the Aforo price and the actual
price was traded in the free-exchange market. In 1987 the official
export rate for Aforos was g550=US$1, whereas the free-market rate
was upwards of g900=US$1. Lower Aforos generally made Paraguayan
exporters more competitive but guaranteed less revenue to the
Central Bank. Aforos were one of several government policies that
fueled contraband trading.
As the manipulation of Aforos demonstrated, exchange-rate policy
was an important economic policy tool of the Paraguayan government
and directly affected most sectors of the economy. Although the
government ostensibly intended to reduce the gaps among the various
tiers of the exchange rate, it was reluctant to reunify the rates
in fear of greatly speeding inflation. Paradoxically, however, the
multitiered exchange-rate system increased inflationary pressures
in numerous indirect ways. One of its most important effects was
the fall in Central Bank reserves associated with the exchange-rate
subsidies for parastatals, a policy that created a growing publicsector deficit. Likewise, Central Bank losses encouraged a more
expansionary monetary policy, most notably through rediscounting
rates. An overvalued exchange rate also hampered export growth in
general, which in turn aggravated Paraguay's balance-of-payments
deficits and potentially its external debt.
Data as of December 1988
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