SCENE-SETTER FOR CODEL REID

UNCLAS ASUNCION 000970

SIPDIS

SIPDIS

PASS TO WHA/BSC

E.O. 12958: N/A
TAGS: PREL PGOV PTER MARR MASS SNAR PA
SUBJECT: SCENE-SETTER FOR CODEL REID


1. (SBU) SUMMARY: Embassy Asuncion warmly welcomes CODEL
Reid November 25-27. Your visit provides an opportunity to
promote U.S. interests in strengthening democratic
institutions, promoting sound economic policies and good
governance, disrupting criminal organizations, and combating
terrorist financing. You come at a particularly important
time for Paraguay, with much of the body politic focused on
presidential elections scheduled for April 2008. Many
Paraguayans, both inside and outside the government, support
closer political and economic ties to the United States.
Your visit will help emphasize the USG's interest in
strengthening ties with Paraguay. END SUMMARY.

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The Political Scene
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2. (SBU) Your visit comes four years into the five-year
presidency of Nicanor Duarte Frutos. In that time, President
Duarte has taken steps to deal with a pressing fiscal crisis,
to revive the economy, and to fight corruption. In the last
year, however, political support for Duarte has sagged, with
polls indicating Paraguayans are not satisfied his government
has taken adequate measures to create jobs, improve the
economy and tackle corruption. Recent opinion polls placed
Duarte's popularity rating at 11 percent, the lowest of any
president in the Western Hemisphere.


3. (SBU) Regionally, Paraguay's relations are dominated by
its larger neighbors, Argentina and Brazil. Paraguay works
within the framework of MERCOSUR to secure economic
concessions from its larger neighbors but has not experienced
the significant benefits it hoped to extract from MERCOSUR
membership. Paraguay has traditionally viewed the United
States as a regional counter-balance. However, Duarte has
increasingly criticized President Bush and stressed greater
appreciation for Venezuelan President Chavez and Venezuela's
"commitment" to the region.


4. (SBU) Duarte hand-picked former Minister of Education
Blanca Ovelar to be his successor, and he intends to run for
a Senate seat in the upcoming election. Duarte's former vice
president, Luis Castiglioni, will compete with Ovelar for the
Colorado Party's nomination (December 16). Castiglioni and
Ovelar run neck-and-neck in recent public opinion polls.
Several political "wild card" candidates have the potential
to wreak havoc in the elections and end 60 years of Colorado
Party rule (a world record). The Supreme Court October 30
overturned former General Lino Oviedo's conviction for his
1996 coup attempt against then-President Carlos Wasmosy.
Following his release from prison and reinstatement of his
full civil and political rights, Oviedo declared his
intention to run for president. Resigned Catholic Bishop
Fernando Lugo is the Liberals' chosen candidate, but he
appears to be declining in public support. Lugo -- who had
been leading all opinion polls until Oviedo's release -- also
faces a potential legal barrier to office because the
constitution bars religious "ministers" from seeking the
presidency.

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Reforming the Economy, But Growth Insufficient
-------------- --


5. (U) Paraguay's formal economy, with a gross domestic
product (GDP) of USD 9.1 billion in 2006, relies heavily on
agricultural exports, especially beef, soy beans, and sugar
cane. (NOTE: Paraguay supplies 95 percent of the United
States' organic sugar. END NOTE.) Paraguay is also the
world's largest exporter of electricity. The country
generates substantial revenues from the Itaipu Dam for
electricity used by its partner, Brazil, and from the
Yacyreta Dam it shares with Argentina. (NOTE: Paraguay
supplies 25 percent of Brazil's total electricity and most of
the electricity used by Brazil's industrialized southern
provinces. END NOTE.) State-owned monopolies that control
key public sectors, including electricity, telecommunication,
water, and sanitation, dominate the public sector. The
private sector, which comprises a small percentage of
Paraguay's GDP, consists of a variety of small-to-medium,
service-oriented companies. The informal economy, estimated
to be as much as one-half the size of the formal economy,
perpetuates illicit transshipment of laundered money, drugs,
contraband, and counterfeit products destined for Brazil,
Argentina, and beyond.


6. (U) Paraguay's economic growth reached four percent in
2006, and inflation was 12.5 percent. The economy is
expected to grow by four percent in 2007. Inflation remains
high, and the currency (guarani) has surged against the U.S.
dollar in the past year. Paraguay has focused on expanding
agricultural production and finding markets for its products,
particularly beef and soy beans. However, the country
suffers from high unemployment resulting from a lack of
investment in the private sector, increased farm and ranch
consolidation, and an over-reliance on commodity exports.
Despite the strong economy, many Paraguayans have emigrated
to Argentina, Spain, and the United States seeking
employment. As a result, overseas remittances have been
become an increasingly large part of Paraguay's GDP, reaching
an estimated eleven percent of GDP in 2007.


7. (U) Paraguay needs to sustain annual economic growth of at
least five percent, and it must undertake deeper structural
reforms to move from an agrarian economy to a modernized one.
Duarte focused on economic reform early in his term, but
progress over the past three years has slowed. Conflicts
between Congress and the Duarte administration have all but
frozen any reform efforts. Congress rejected several
Inter-American Development Bank (IDB),European Union, and
Japanese development loans (Paraguay maintains a line of
credit with the IDB) and suspended the implementation of a
personal income tax for the next year. Duarte worked to
expand trade relations through regional trading blocs such as
MERCOSUR, and actively lobbied to join the Andean Trade
Promotion and Drug Eradication Agreement (ATPDEA) to receive
preferential trade treatment. As the 2008 election
approaches, inadequate political will exists to take on tough
economic reform.

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International Crime, Corruption, and Counter Terrorism
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8. (SBU) The Tri-Border Area (TBA),where Paraguay, Brazil,
and Argentina meet, is a primary USG concern. The area, with
its loose borders and lax controls, is a hub for
trans-national criminal activity including drug trafficking,
trafficking in persons, arms trafficking, intellectual
piracy, document forgery, contraband, and money laundering.
Brazil has tightened its border controls with positive
results, but significant money continues to flow out of
Ciudad del Este (CDE). Paraguay is widely regarded as the
weakest link in combating the illicit activities that occur
in the TBA. Corruption at multiple levels undercuts law
enforcement efforts. Nevertheless, Paraguay has taken
serious steps to address its institutional deficiencies by
creating special units, principally in Customs and the
Ministry of Industry and Commerce (MIC) to investigate
intellectual property rights (IPR) violations and customs
fraud. The MIC's Specialized Technical Unit (UTE) has made
significant seizures of counterfeit products with USG
assistance. Paraguay's Anti-Money Laundering Secretariat
(SEPRELAD) also receives U.S. technical assistance and
support.


8. (SBU) Corruption in Paraguay's political and economic
system undermines its efforts to modernize. Transparency
International rated Paraguay the fourth-most corrupt country
in Latin America in 2007, not far behind Haiti, Venezuela,
and Ecuador. Corruption tends to peak prior to elections,
and is also rampant in Paraguay's economy, particularly in
public monopolies. Recent allegations that the director of
the Itaipu Binational Enterprise, which oversees the Itaipu
Dam, siphoned dam revenues for personal use, underscore
corruption in Paraguay's economy. The USG has worked closely
with local law enforcement officials and prosecutors to
actively combat corruption. U.S. support for Paraguay's
Trade Transparency Unit has resulted in the uncovering of USD
four billion in goods illegally imported into the country.


10. (SBU) The Paraguayan Congress is considering a new
criminal code which includes anti-money laundering
provisions, and should become law before year's end.
Although the Chamber of Deputies, or lower house, passed
counter-terrorism (CT) legislation as part of the criminal
code, the Senate -- faced with rising public protests fearing
potential abuses -- removed it from the final version.
Congress will also consider a new criminal procedures bill in
the coming year.


11. (SBU) Paraguay is a major transshipment point for cocaine
from Colombia and Bolivia to Brazil. Paraguay also provides
most of the marijuana consumed in South America. The
Anti-Drug Secretariat (SENAD),perhaps Paraguay's most
effective law enforcement body, coordinates interdiction
efforts with significant DEA assistance. Working closely
with the United States, SENAD has effectively targeted
Brazilian trafficking groups based in Pedro Juan Caballero
(PJC) on Paraguay's northern border with Brazil. SENAD has
made a number of significant arms seizures with evidence
indicating links to Brazil's PCC and Colombia's FARC.
Presently, SENAD is hard-pressed to meet challenges in CDE
due to a lack of resources (its national annual budget is
just $2 million). SENAD inaugurated a helipad in PJC April
11, the second phase of a State Department-funded project to
create a regional SENAD operational base.


12. (SBU) A culture of distrust hampers the ability of
Paraguay's law enforcement community and military to tackle
rising concerns about public security; Paraguay's National
Police are widely disparaged by the general population as
incompetent and corrupt. Of late, major robberies, including
the August theft of USD one million at the airport in
Asuncion, and kidnappings, including the September kidnapping
of the granddaughter of former vice president Luis Maria
Argana, are on the rise.

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U.S. Activities
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13. (SBU) USG activities in Paraguay focus on strengthening
democratic institutions, promoting sound economic policies
and good governance, disrupting criminal organizations, and
combating terrorist financing. Post maintains bilateral
assistance programs dealing with combating narcotics
trafficking, money laundering, intellectual property
violations, and trafficking in persons. A Department of
Justice Resident Legal Advisor and advisors from Treasury's
Office of Technical Assistance have worked behind-the-scenes
over the last three years to assist the Paraguayan government
to add money laundering and other major reforms to the new
criminal code currently pending in Congress. The 180-member
Peace Corps contingency in Paraguay represents its
third-largest group of volunteers and trainees worldwide.


14. (U) USAID manages a small but high-impact assistance
program in Paraguay directed at key development constraints
in democracy, health, economic growth and the environment.
USAID's democracy programs are focused on anti-corruption
activities, greater accountability and transparency in local
government, and rule of law reform. USAID is also working to
reduce poverty through its "Paraguay Vende" ("Paraguay
Sells") program designed to help small and medium enterprises
in poor areas of the country access new markets, increase
sales, and create jobs. USAID's health programs are working
to reduce maternal and child mortality and improve other
critical health systems. USAID is also helping protect
bio-diverse areas and promote better natural resources
management. USAID also administers Paraguay's USD 35 million
Millennium Challenge Account (MCA) Threshold Country Program
(TCP),a two-year effort directed at reducing impunity,
strengthening key institutions, and business formalization.
The Threshold Program, which involves 28 Paraguayan
institutions including the Congress and the Supreme Court, is
at its midway point. Paraguay has made solid material
progress under the program, but control of corruption remains
an ongoing challenge. USAID's total non-TCP assistance to
Paraguay this year totaled USD eight million.

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The Military's Mission
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15. (SBU) Paraguay's military is a small force struggling to
redefine its mission despite insufficient funding and
intermittent scandals. The Army is the largest of the three
services (6,000),followed by the Navy (2,000) and Air Force
(1,200). The military's primary missions are to protect
Paraguay's territorial integrity, defend the government in
accordance with the constitution, and cooperate in civil
defense. It does not play a leading role in counter-drug
operations, although the military provides a specialized
tactical unit to support SENAD. The military's Special
Forces unit is in the process of organizing a company-size
counter-terrorism unit, and the Presidential Guard Unit has a
specialized counter-terrorist platoon. More recently,
Paraguay has attempted to increase its presence in
international peacekeeping operations. Brazil supports
Paraguay's deployment of 33 troops to Haiti; Paraguay is also
training a 132-member engineering company to deploy worldwide
as part of the Global Peacekeeping Operation Initiative
(GPOI).

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The Impact of Your Visit
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16. (SBU) When meeting with local interlocutors, Post
suggests you emphasize the United States' long history of
friendship with Paraguay and our desire to continue close
relations with Paraguay's next president, provided that s/he
E
is both elected and governs democratically. You might also
highlight the importance of free and transparent elections
and the important role international observers play in
monitoring such elections. On trade, you might express
interest in a continued dialogue to expand Paraguay's access
to U.S. markets, but lower Paraguay's expectations about
receiving ATPDEA trade benefits. It would be useful to
recognize Paraguay's progress in fighting corruption and
formalizing its economy via its Milenium Challenge Account
Threshold Program, and encourage them to take full advantage
of that program. Support for final passage of the Senate's
version of the criminal code -- with strong sanctions against
intellectual property rights violations and money laundering
-- would be a clear sign of Parguay's seriousness to improve
its international image. You might express gratitude to
Paraguay for hosting the January 10-11 "3 plus 1" group
meeting on counter-terrorism, as well as the Joint Council on
Trade and Investment (JCTI) conference December 4 which will
touch on trade and intellectual property issues. Finally, it
would also be helpful to encourage Paraguay to continue its
efforts to train and support its contingent of UN
peacekeepers, and offer continued U.S. military assistance
via training programs and exchanges.

Please visit us at http://www.state.sgov.gov/p/wha/asuncion
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