PARAGUAY POLITICAL AND ECONOMIC UPDATE, MARCH

UNCLAS SECTION 01 OF 02 ASUNCION 000453

SIPDIS

STATE FOR WHA/BSC, EB/IFD/OIA, AND NEA/IPA
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E.O. 12958: N/A
TAGS: PGOV PREL ECON PBTS MOPS PINR PA
SUBJECT: PARAGUAY POLITICAL AND ECONOMIC UPDATE, MARCH
24-APRIL 1



1. Summary
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--Cabral and Rienzi votes postponed
--Paraguay establishes diplomatic relations with Palestine
--Border problems continue, 150 Brazilians expelled
--Paraguayan Navy called into action vs smuggling
--Standard & Poor's maintains Paraguay's credit rating
--2005 growth estimate revised downward

Cabral and Rienzi votes postponed
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2. On March 30, the Senate postponed scheduled votes on both
the reappointment of Supreme Court Justice Wildo Rienzi and
the promotion of police officer Aristides Cabral to the rank
of Police Commissioner. In both cases, the bloc of Colorado
Party (ANR) senators stopped votes when neither proposal
appeared to have adequate support to pass. Juan Carlos
Molas, a lawyer and confidant of Vice President Luis
Castiglioni, told PolOff that Rienzi can remain on the Court
as long as no successor is named and confirmed, and that the
Duarte Administration plans to keep him on the court in this
manner for two years, when he will reach the mandatory
retirement age of 75. In Cabral,s case, the nomination for
promotion remains active, and according to various sources,
still has Presidential support. ANR senators intend to bring
the promotion to a vote at a later date.

Paraguay establishes diplomatic relations with Palestine
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3. On March 26, the GOP announced the establishment of full
diplomatic relations with the Palestinian Authority via a
signed agreement between FonMin Leila Rachid and Palestinian
"Foreign Minister" Nasser al-Kidwa. The agreement is the
latest in a series of moves by Rachid to broaden Paraguayan
relations with the Arab world. While the Israeli Ambassador
referred to the establishment of relations as a
disappointment during a meeting with the Ambassador, Foreign
Ministry staffer Edgar Ynsfran told PolOff that relations are
not likely to deepen, as the Ministry has no resources to
open new missions in the region (beyond the one being opened
in Beirut) or to increase diplomatic staffing. He added that
overtures to the Arab world are primarily a personal interest
of the Minister rather than a larger GOP policy.

Border problems continue, 150 Brazilians expelled
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4. The war of words between the Paraguayan and Brazilian
governments over attempts to stop smuggling in the Tri-Border
Area continued, with FonMin Rachid accusing Brazil during her
Senate testimony of implementing "exacerbated and
out-of-proportion" control measures along its borders with
Paraguay. At the same time, Rachid conceded that Paraguay is
responsible for much of the smuggling in the region, stating
that Ciudad del Este is based upon a commercial model that
cannot survive, and that Paraguay must show that it is
serious about fighting smuggling and piracy. Brazil did
agree to increase the quota for duty-free personal purchases
in CDE from $150 to $300, but streessed that they will
prevent efforts to use this as a means to import goods for
commercial purposes.


5. Paraguay has responded to the Brazilian crackdown by
expelling 150 Brazilians working illegally in Ciudad del
Este. Many Ciudad del Este shopkeepers are Brazilian
nationals who reside in the Brazilian city of Foz do Iguacu
and cross the border daily to tend their businesses. A
significant portion of these individuals do not have the
legal documents to work in Paraguay, while others are legal
permanent residents of Paraguay who do not maintain
residences here as required. The Immigration Department
estimates that approximately 7,000 Brazilians work illegally
in Ciudad del Este. Carlos Liseras, the Director of
Migrations, denied that the measures are in retaliation for
the anti-smuggling operations carried out by Brazilian forces
in the border region. According to the press, the operation
has reduced trade volume in Ciudad del Este by 80 percent.
Other press accounts claim that over 3,000 businesses in
Ciudad del Este have folded during the last three years.

Paraguayan Navy called into action against smuggling
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6. President Duarte ordered the Paraguayan Navy to assist
Customs enforcement at Ciudad del Este. Several small
vessels are involved in the operation, including one that was
deployed from Asuncion. Customs officials are working
directly on naval vessels on the Parana River. Though the
president's order did not provide an end date for this
operation, it's believed it may last approximately another
week.

Standard & Poor's maintains Paraguay's credit rating
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7. On March 17, S&P issued a rating report for Paraguay in
which it maintained Paraguay's B-rating, with a stable
outlook. The stable outlook was based on an expectation that
macroeconomic stability would be maintained, but also that
political pressure would stall structural reforms, especially
of the State-Owned Enterprises (SOEs). The report states
that renewed success in carrying out reforms could lead to a
higher credit rating, and characterized Paraguay's
institutional framework as the major constraint on the rating.

2005 growth estimate revised downward
--------------

8. The Central Bank announced that it was reducing its 2005
real economic growth estimate downward from 4 percent to 3.5
percent due to the drought that has reduced soy and cotton
output. The inflation target for 2005 will be 5.5 percent
plus or minus 2.5 percent, a slight adjustment from the 6
percent plus or minus 2 percent target noted in the most
recent IMF review document. Annual inflation for 2004 was
2.8 percent, the lowest level in three decades.
KEANE