PARAGUAY: SENATE PASSES PUBLIC BANKING LAW

UNCLAS ASUNCION 000417

SIPDIS

DEPT OF TREASURY WASHDC
DEPT OF COMMERCE WASHDC
DEPT OF JUSTICE WASHDC
NATIONAL SECURITY COUNCIL WASHINGTON DC
USSOUTHCOMMAND MIAMI FL

STATE FOR WHA/BSC, WHA/EPSC, EB/IFD/OMA
STATE PASS TO USTR FOR SCRONIN, LYANG
TREASURY FOR OSIA MAUREEN WAFER
COMMERCE ITA SARAH COOK
NSC FOR MIKE DEMPSEY
SOUTHCOM FOR POLAD
USAID FOR AA/LAC ADOLFO FRANCO

E.O. 12958: N/A
TAGS: ECON EFIN EINV KMCA PGOV PREL PA
SUBJECT: PARAGUAY: SENATE PASSES PUBLIC BANKING LAW
OPENING WAY FOR FOURTH IMF REVIEW



1. In a special session on March 8, the Paraguayan
Senate passed the public banking law establishing a
single second tier public bank, complying with a
performance criterion and opening the way for the
fourth review of Paraguay's International Monetary Fund
program. The Senate debated for about seven hours, but
did not make major changes to the bill. While the
Senate struck an article that applied the same
prudential norms applicable to private banks to the
public bank, it included language giving the executive
branch the power to draft implementing regulations.
The Minister of Finance told Econchief that he was
pleased with the outcome, and that the Ministry would
draft implementing regulations to apply appropriate
prudential norms to the bank.


2. The resident IMF representative told Econchief that
the version passed by the Senate had been reviewed by
the IMF's Monetary and Financial Systems Department
(MFD),which deemed the bill in compliance with the IMF
program. He also noted that not all public banks are
subject to the same prudential norms as private banks.


3. The Ministry of Finance lobbied hard for the law's
passage, and Diego Abente, a former Member of Congress
and Political Advisor to the Finance Minister, believes
that the law will have an easier time in the Chamber of
Deputies, where it is expected to be considered in
early April. Some private observers disagree, though,
and believe the law may face some attempts to legislate
easy access to credit for small farmers and businesses.


4. The Second Tier bank, known as the Financial Agency
for Development (AFD by its Spanish initials) would
become the sole public wholesale bank, channeling
longer-term funds from the IFIs and perhaps from
domestic entities such as the social security fund to
both public and private retail banks. The AFD would
subsume three small entities that currently act as
wholesale lenders for the provision of financing for
small businesses and rural farmers.


5. The second part of the public banking reform
process will be the consideration by the Senate of the
draft law consolidating the seven public retail (first
tier) banks into a single entity. The Senate is now
expected to consider the first tier law on April 5.
The existing retail public banks are dominated by the
bankrupt Banco National de Fomento (BNF),which has non-
performing loans (NPLs) on the order of 55 percent of
total loans. The other six entities are relatively
small credit agencies and do not act as banks. The
first tier reform is expected to be much more
contentious, as any perceived tightening of credit to
small farmers and businesses will likely face
resistance.

KEANE