Brazil & Southern Cone - August 2012 (ISSN 1741-4431)

Although the new government headed by President Federico Franco has very little time in office, its ambitions are big. Within weeks of taking office it declared that that one of its key objectives is to lay the foundations to industrialise Paraguay’s agri-based economy. The new administration might do better to use its limited time to support the key agricultural sector, which is still struggling to recover from a disastrous start to the year [RBS-12-01]. Moreover, Paraguay’s suspension from the Southern Common Market (Mercosur) has also fanned uncertainty about the country’s international trade and diplomatic relations.

Upon his investiture on 22 June, President Franco declared that he would endeavour to achieve more in his brief term than his predecessor Fernando Lugo (2008-2012) did in four years. In his first month, the president has concentrated his efforts on stabilising the country and seeking to gain legitimacy for his administration abroad.

Latterly, the government has begun to turn its attention to the battered economy. In a meeting with local business leaders on 26 July Franco presented his vision for the future. He said that the country must to stop being an “amateur state” heavily dependent on its agricultural exports and look to develop a larger industrial sector. According to Franco, Paraguay has the capacity to achieve this because it has abundant resources, such as land and energy that potentially could make it more competitive than its bigger Mercosur partners, Argentina and Brazil. Franco suggested that this industrialisation process could begin as soon as the government secures the installation in the country of Rio Tinto Alcan’s proposed aluminium project. The US$3.5bn project was presented to the Lugo administration in 2010 but has been delayed by concerns about its environmental impact and its massive energy requirements.

Franco said that the new government had taken over the negotiations with the conviction that it represents a major opportunity for the country to break the “vicious cycle” by which it is practically “gives away” its surplus energy to both Brazil and Argentina. He expressed confidence that the project will soon get full approval in congress, which so far has been cooperating with the new executive. Max Haber, the president of Paraguay’s industry, production and trade federation, urged the government to take advantage of its honeymoon phase to push forward other long-delayed infrastructure projects deemed crucial to economic development, including road schemes and the dredging of the Paraguay River. Franco’s public works minister, Enrique Salyn Buzarquis, seconded that, noting that the new administration wants to develop infrastructure projects that will benefit the country in the next 20 to 30 years. However, the window of opportunity for the Franco government will close as fast as it opened; by early 2013 Paraguay will be in a new general campaign ahead of the 21 April polls, at which point congress may be less obliging.

Critics argue that the Franco government should focus its attention on dealing with more pressing short-term concerns. The agriculture ministry has already warned that the 2012 maize, cotton and sesame harvests will be the worst ever. Drought has decimated 60% of soy, the country’s main export crop. Producers project losses of over US$2bn. Elsewhere, the national animal plant quality and health inspection service (Senacsa) revealed on 24 July that first half beef exports were down 17% year-on-year over the same period of last year as a result due to a Foot and mouth disease (FMD) outbreak. This translated into revenue losses of US$96m.

• An obliging congress

Now that the former president Fernando Lugo is no longer in office, Paraguay’s often contrarian congress has turned over a new leaf. Indeed since Federico Franco succeeded Lugo in late June, the congress has approved US$480m of previously blocked infrastructure projects, as well as a US$125m loan from the Inter-American Development Bank to upgrade Asunción’s public transport system. But in the biggest surprise of all, it also approved implementation of the new personal income tax regime (IRP), which it had blocked for the past six years. Seizing the opportunity, Finance Minister Manuel Ferreiro has urged the congress to also unblock an additional US$550m in loans from international organisations.