Political protests could impede Paraguay’s new fiscal responsibility law

The increase in political uncertainty in Paraguay – as demonstrated by protesters setting the country’s Congress building alight during last week’s Inter-American Development Bank (IDB) annual meeting in Asunción – might slow the country’s economic growth, but not derail it.

That is the assessment of senior bankers in the country. Raul Vera Bogado, executive president at Banco Regional, argues that the biggest consequence of the violence will be a slowdown in proposed changes to the country’s fiscal responsibility law.

The current law caps the fiscal deficit to 1.5%, but Paraguay’s finance minister Santiago Peña has been working to increase the law’s flexibility to allow greater investment in infrastructure and give the country an ability to take a counter-cyclical stance.

“The protests [which were sparked by a constitutional amendment to allow president Horacio Cartes to run for a second presidential term] will make the proposed changes to the fiscal discipline law more difficult, which will also slow the growth of investment in infrastructure,” says Bogado in an interview with Euromoney at the bank’s Asunción headquarters.

“Infrastructure investment was going to be classed as structural deficit category – in line with the fiscal discipline rules adopted in Chile. These changes will be more difficult now – as will convincing people to accept higher government debt, which is a very sensitive issue in Paraguay.”

In March, Peña told Euromoney he had been working with Felipe Larrain, once Chile’s finance minister, for a year and a half on a replacement fiscal law that provides counter-cyclical flexibility. Peña argued a simple cap of a 1.5% fiscal deficit is an unnecessary straitjacket on a country with such low debt (18.4% of GDP) and cyclical tax revenues – external revenues related to trade and the Brazilian economy, and internal exposure to weather and agricultural productivity.

“We have exceeded capacity,” Peña told Euromoney. “Not financially, but legally in terms of the fiscal responsibility law. [The law] is extremely tight and doesn’t make any sense for a country like Paraguay that has the lowest debt-to-GDP [in the region] to have a maximum deficit of 1.5%.”

Peña had planned to introduce the new fiscal rules later this year with the intention it will govern the fiscal plans of the next government.  However, Bogado says that despite the likely slower growth in government-led investment, the country should continue to grow strongly – especially when compared with the rest of the region.

For the full article visit Euromoney Magazine

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