PARAGUAY'S 2006 BUDGET PROPOSAL, PUBLIC BANK LAW

UNCLAS SECTION 01 OF 03 ASUNCION 001213

SIPDIS

STATE FOR WHA/BSC, WHA/EPSC
STATE PASS TO USTR FOR LYANG, MSULLIVAN
USAID FOR AA/LAC ADOLFO FRANCO
TREASURY FOR OSIA MAUREEN WAFER
TREASURY FOR OTA RICHARD BARTHOLOMEW
COMMERCE ITA SARAH COOK
NSC FOR MIKE DEMPSEY, SUE CRONIN
SOUTHCOM FOR POLAD
US SOUTHERN COMMAND MIAMI, FLORIDA

SENSITIVE

E.O. 12958: N/A
TAGS: ECON EFIN ETRD PA
SUBJECT: PARAGUAY'S 2006 BUDGET PROPOSAL, PUBLIC BANK LAW
AND TOURISM LAW


1. (U) This cable is Sensitive but Unclassified. Please
protect accordingly.

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Summary
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2. (SBU) Paraguay's 2006 budget proposal, recently
submitted to Congress, projects a fiscal deficit of 0.66% of
GDP, with 2006 real GDP growth of 3.5 percent (vice 3.25
percent for 2005) and inflation of 6 percent plus or minus 2
percent (the same target as for 2005). Minister Bergen told
the Ambassador that he would execute the budget to aim for a
zero deficit in 2006, and that the budget proposal was
developed with greater interagency coordination than in past
years. The Ambassador flagged our concern with the tourism
law making its way through Congress that includes a mandated
six percent commission for travel agents on airline ticket
sales. Bergen shares our concerns, but expressed doubt that
the provision would be vetoed. The Ambassador also noted
the problems embodied in the first tier public bank bill
passed by both houses of Congress. Bergen agreed and was
hopeful that the President would veto the bill when it
reaches his desk. End Summary.


3. (SBU) In a meeting to request budget related technical
assistance (SEPTEL),the Ambassador and Finance Minister
Bergen discussed the GOP's 2006 budget, the draft tourism
law and the first tier public bank law. Vice Minister of
Economy Jorge von Horoch and Econchief also attended the
meeting.

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GOP's 2006 BUDGET PROPOSAL
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4. (U) Minister Bergen described the GOP's 2006 budget
proposal, submitted to Congress in late August, as a serious
budget developed with significant interagency consultation,
including with input from the President and Vice President.
The budget projects a fiscal deficit of 0.66% of GDP, with
2006 real GDP growth of 3.5 percent (vice 3.25 percent for
2005) and inflation of 6 percent plus or minus 2 percent
(the same target as for 2005). The proposed budget calls
for a level of spending approximately equal to the level of
spending approved by Congress for 2005.


5. (SBU) Actual execution of the 2005 budget will be lower
than the level approved by Congress last year, when Congress
boosted proposed spending by 8 percent over that proposed by
the executive, which, if executed, would have resulted in a
budget deficit of about 2.5 percent of GDP. The Ministry,
through under-execution, is aiming for a balanced result for
2005, and will aim for balance in 2006 as well, according to
Bergen. In 2002 through 2004, Congress passed a budget
slightly lower than that proposed by the Executive. Bergen
expressed hope that the conscious effort by the Ministry of
Finance to develop the budget in close consultation with
other ministries would reduce the amount of direct lobbying
of Congress typically done by other Ministers.


6. (U) The administration's official message to Congress
submitted with the 2006 proposal notes that 2004 central
government revenues were up 34.1 percent over 2003 and 70
percent over 2002, the year of Paraguay's worst recent
recession. Through the first half of 2005, central
government revenues were up 15.7% over the same period in

2004. The message also notes that current spending has
risen slowly, but that capital spending has increased more
rapidly.


7. (SBU) The Ambassador asked Minister Bergen about how all
the increased revenue collections of the past two years have
been spent. Bergen pointed to increased debt service
(including external and the small amount of internal debt),
which is projected to be $293 million in 2006, a 77 percent
increase over the amount of debt service in 2002. Also, the
budgets of the electoral commission and the judiciary, as
well as the amount of money going to political parties, have
increased significantly.


8. (SBU) The 2006 budget has an increased emphasis on
social spending and real investment. Actual execution of
amounts budgeted for GOP investment in the past few years
has been about fifty percent. This year, the Ministry spent
time discussing investment projects with project managers to
get a better handle on actual capacities, and the Minister
believes the 2006 budget proposal is more realistic with
respect to government investment. Bergen said that, working
with President Duarte and within the Economic Cabinet,
approximately $130 million of investment proposals submitted
by other ministries was not included in the budget proposal.


9. (SBU) Treasury's Resident Budget Advisor believes that
the 2006 budget proposal is an improvement over past budgets
because is does include more realistic spending proposals
and was developed with greater inter-ministerial
collaboration that included a more conscious effort to
coordinate broad spending priorities. However, the
budgeting process remains more focused on quantities of
expenditures than on the effectiveness of goods and services
to be purchased.

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TOURISM LAW WITH MANDATED COMMISSIONS
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10. (SBU) The Ambassador flagged our concern with the
tourism law making its way through Congress that includes a
mandated six percent commission for travel agents on airline
ticket sales. American Airlines has told us that it will
consider abandoning the market on principle should the bill
become law. The law has passed both houses of Congress and
is with the Senate for consideration of the two versions,
both of which include the commission. Detractors argue that
the law is a setback for Paraguay's business climate and
runs counter to efforts to promote more civil aviation as
evidenced by the GOP's signing of Open Skies agreements with
the US, Chile and Panama. Many members of Congress, though,
have connections with travel agencies.


11. (SBU) The Ambassador told Bergen that mandating the
commission level would send a bad signal for the business
climate and could lead to the exit of American Airlines
(which provides the only wide-body service to Paraguay, with
its accompanying larger cargo capacity). Bergen said that
he completely agreed that the provision was a bad idea, and
that he had spoken about it with President Duarte and the
President's Economic Advisor Carlos Walde. He cautioned,
though, that with a number of Congressional members having
relatives in the travel agency business, he thought that
Congress may have the two third's majority necessary to
overcome a Presidential veto, should one be forthcoming.

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FIRST-TIER PUBLIC BANK LAW
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12. (SBU) The Ambassador also noted the problems embodied
in the first tier public bank bill passed by both houses of
Congress, each with its own set of changes to the original
version that weaken the law to the point where it may be
worse than the current situation. The bill is currently
with the Senate, which must either reaffirm its version, or
vote to accept the Lower House version. President Duarte
has stated publicly that he will consider a veto of the
bill.


13. (SBU) Minister Bergen acknowledged that the Senate
version was unacceptable. While the bill was still under
consideration by the lower house, the Executive branch made
a strong effort to convince leaders to pass the executive's
version, to include the President hosting an event at his
residence with Colorado deputies. At the last minute,
though, the deal fell through and the lower house passed a
version that would give extraordinarily generous benefits to
employees of the bank dismissed as part of the reform.
Bergen noted that if turned into law, it would set a bad
precedent affecting future reforms. Bergen supports a
Presidential veto of the legislation.

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COMMENT
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14. (SBU) The failure of the President to prevail in the
Lower House on the public bank law demonstrates the limits
to his ability to get what he wants legislatively, despite
the new coalition that increased Colorado Party control of
the Congress. The President at times has to face resistance
to reforms from within his own party. While it's difficult
to know just how hard the President pushed for the law,
Bergen's comments and the President's subsequent public
statements about vetoing the law suggest that he did lobby
for the executive's version. For Paraguay's future
development, the reform of the first tier public bank is
more important than mandated airline ticket commissions, and
a veto of the first bill is more likely than the latter.
The continued commitment to fiscal restraint evident in the
new budget and Minister Bergen's comments is reassuring. It
also adds to the evidence that concerns of some observers
that Minister Borda's departure in May would lead to fiscal
profligacy were overblown.

KEANE