Brazil & Southern Cone - October 2013 (ISSN 1741-4431)

Less than a month into his term, Paraguay’s President Horacio Cartes is moving to introduce legislation aimed at reinforcing the country’s public finances. His efforts are being resisted in congress by his own party, the Asociación Nacional Republicana-Partido Colorado (ANR-PC). This is the first serious test for the political neophyte Cartes, who is facing mounting divisions within the ANR-PC.

Determined to stem Paraguay’s current financial difficulties [RBS-13-08], Cartes has moved to tackle the issue head on: first with a commitment to fiscal probity in the 2014 budget and secondly proposing a new ‘fiscal responsibility law’ to impose strict limits on government spending.

Traditionally, Paraguay’s congress has had a free rein over the country’s budget, a legacy of the dictatorial regime headed by Alfredo Stroessner (1958-1989) and the highly corrupt ANR-PC governments that followed it thereafter until 2008. Seen by members of congress as an opportunity to secure public funds for their various pork barrel projects, congress consistently inflates the annual budget. However, the scale of this has reached unprecedented levels in recent years, as the recent soya boom inflated treasury coffers.

According to a local think-tank, Centro de Análisis y Difusión de la Economía Paraguaya (Cadep), government spending on ‘professional services’ (which accounts for 60% of current spending and includes salary payment for congressional and executive officials) increased by an average of 15.2% a year in 2002-2012, with the increase reaching 29.7% last year. Though the ANR-PC temporarily lost its hold on the presidency in 2008, it retained a majority in congress, which it used to influence the budget and in the process make life difficult for the administrations led by Fernando Lugo (2008-2012) and Federico Franco (2012-2013).

Although Paraguay’s poor economic performance last year put the interim Franco administration in a particularly difficult financial position, congress showed little sympathy in approving a bloated and underfunded 2013 budget.

The 2014 budget, drafted by the outgoing Franco administration in consultation with Cartes’s transition team, is currently being debated by the new congress., President Cartes has urged congress, and in particular his ANR-PC colleagues, not to make too many amendments to the proposal on the grounds that it was carefully put together to ensure that the two consecutive years of annual fiscal deficits could be reversed in 2014. After eight consecutive years of fiscal surpluses, Paraguay recorded a fiscal deficit of 1.5% of GDP in 2012 and expects another in the order of 1.7% of GDP this year. The president’s call was not welcomed by the ANR-PC, which complained that he was seeking to exert undue influence on congress. The relationship between Cartes and the ANR-PC is already tense given his failure to accommodate the various party factions by divvying up the various government posts, opting instead for a bunch of technocrats.

New battleground

Already struggling with a hostile congress over the budget proposal, Cartes upped the stakes by proposing a fiscal responsibility law that would set clear limits on budget spending and curtail the congressional ability to discretionally increase the budget, proposing instead that any mooted changes first be approved by a finance ministry technical commission. The proposal was presented to the ANR-PC senate bench on 29 August, ahead of its scheduled formal submission to congress on 3 September. It failed to receive full backing and was immediately criticised by those Colorado senators not in Cartes’s ‘Honor Colorado’ faction.

The dissident ANR-PC senators, which include the bench leader and former vice-president Luis Castiglioni (2003-2007), who heads his own ‘Vanguardia Colorada’ faction, argued that legislation forbidding congress from modifying the budget at its discretion would be unconstitutional, undermining the congress’s constitutionally-sanctioned prerogatives. The senators said that in order to redress this, the initiative should only stipulate that congress and the executive must agree on budgetary spending limits on a periodic basis; and once agreed, these could become binding and enforceable by both sides.

As the details of Cartes’s proposal became public, the congressional opposition backed the dissident ANR-PC senators, complaining that the proposed law was an attempt by Cartes to concentrate more power in the executive, at the expense of congress and in clear violation of the constitutional division of powers.

The Leftist opposition also argued that the proposals for a fiscal deficit ceiling of 1.5% of GDP and a limit on current expenditure increases of no more than 4% above annual inflation would be insufficient to allow the country to sustain and/or increase social spending. Opposition leaders backed the calls by the dissident ANR-PC senators to amend the bill so that rather than imposing legal spending limits, the executive and the congress would together agree to certain limits via ‘political agreement’.

Political wrangling

The staunch resistance to the fiscal responsibility law proposal forced the Cartes administration to postpone its submission to the senate. In an effort to build a broader consensus behind the proposal, Cartes himself held a series of meetings with the leaders of the congressional benches, in which he stressed that his proposal was based on existing legislation successfully implemented in other countries in the region such as Chile, Peru and Mexico.

However, after meeting with Cartes and his advisors on 4 September, Castiglioni said that the government had recognised that the proposal was “poorly drafted” and risked being interpreted as unconstitutional (see sidebar). As such, Castiglioni said, the two sides had agreed that the proposal should be “corrected”. According to Castiglioni, Cartes agreed to let the senate take over the initiative and draft a new proposal, based on the original but with modifications. However, when the senate amendments appeared to give congress the ability to control the executive’s discretionary funds, Cartes on 18 September publicly accused it of going beyond what had been agreed: “We want this law as we presented it; the modifications being made... may be interesting but they should not be included in this law”, the president stated, suggesting that the senate was trying to derail the initiative.

After another round of meetings between Cartes and ANR-PC leaders, the two sides on 20 September said they had settled on version of the bill closer to the original proposal, but notably still allowing congress to make budget changes without having to obtain prior finance ministry approval. This amended bill was duly approved by the senate on 26 September. A few days earlier, on 22 September, Cartes made a series of appointments at the helm of important public institutions including the state telecoms firms (Copaco), the national land development institute (Indert) and the Yacyretá bi-national hydroelectric plant. All of these went to ANR-PC political leaders, in what looked like political appointments designed to smooth passage of the revised fiscal responsibility law bill through the senate and the chamber of deputies, where it is now. Cartes may be learning the hard way how to play politics; but it remains to be seen what concessions he will have to make in future to keep the congress onside.

• Unconstitutional and inexperienced

Luis Castiglioni said the proposed fiscal responsibility law needed to be “perfected” as it included articles “that clearly go counter to the constitution”. Castiglioni noted that presidential aides had admitted to this but had defended themselves by saying that they had asked ANR-PC senators to look over the draft proposal before submitting a formal bill to the senate. Castiglioni quipped that this evidenced the “inexperience of the president’s collaborators”.

• The IMF loves fiscal responsibility

On 26 September Kevin Ross, the International Monetary Fund (IMF)’s resident representative for Peru and Paraguay, welcomed the approval of the fiscal responsibility bill by Paraguay’s senate. Ross said that similar laws had been positive for the likes of Peru, Colombia and Mexico, stressing that fiscal discipline facilitates private investment by offering medium term stability and predictability in the medium and long term. Noting that Paraguay currently has “the highest rate of return on FDI [Foreign Direct Investment] in Latin America (est. 17% in 2012), Ross noted: “There is little FDI coming into the country....if the country could improve its public finances, it would attract more investment”. On UN figures, Paraguay took in just US$320m in FDI in 2012, from US$215m in 2011.