US embassy cable - 05ASUNCION1213

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 
-------------------------- 
 
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 
------------------------------------- 
 
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 
-------------------------- 
 
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