Memorandum by the National Advisory Council Staff Committee to the National Advisory Council
Document No. 1226
Subject: Proposed International Bank Loan to Paraguay
Problem
The U.S. Executive Director2 on the International Bank has requested NAC consideration of a proposed $5 million loan to the Government of Paraguay to finance the foreign exchange costs of an agricultural development program (NAC Document No. 1209 and NAC Staff Document No. 545).3
Discussion
1. The loan application. The proposed loan would finance the foreign costs of equipment, supplies, etc. for agricultural development to be used in about 1½–3 years; some items would be obtained and put to use very quickly, while others would serve Paraguay’s needs over a longer period. The largest category, valued at about $3 million, includes chiefly hand utensils and animal-drawn equipment to be sold to individual farmers. The next largest, of $1.2 million, covers veterinary supplies, insecticides, fertilizers and fencing materials. Although these articles are usually viewed as goods used up in the process of production [Page 1576] rather than as capital equipment appropriate for long-term financing, in this case it is considered that they are essential to the over-all program. Other items include equipment for farm machinery pools, road building equipment, and a small fleet of trucks.
Interest on the loan would be at 4-⅜ percent. The 14 semiannual amortization payments would begin May 1, 1954, but the greater part of the amortization—$4.4 million—would occur in the years 1957–60. The International Bank is satisfied that private financing of the proposed program is not available.
2. The program. The farm equipment and supplies would be sold for cash or credit by the Credito Agricola de Habilitacion (CAH) or the Bank of Paraguay. To assure proper utilization of the goods, agricultural extension services would be furnished under a reorganized and expanded operation of the CAH. The IIAA and its local affiliate known as STICA, continuing the technical assistance furnished since 1942, would make available supervision on which the over-all success of the agricultural program will largely depend. The loan project was, in fact, prepared in collaboration with IIAA and STICA, which recommend its approval. The loan is also recommended by the U.S. Ambassador to Paraguay, who is co-chairman of the U.S.-Paraguayan Joint Commission for Economic Development.
The proposed agricultural program is expected to increase the land under crop cultivation from 302,000 hectares to 354,000 hectares, leading to greater production of manioc (cassava), cotton, corn, peanuts, peas, sugar cane, tobacco and other crops. The increased exportable cotton production would be about 5 million pounds at 1948–50 average yields and would be worth about $1.5 million at 30 cents a pound. Increased exports might also be expected of tobacco, vegetable oils and possibly other items.
3. Economic development needs. It appears that in a sound economic development program for Paraguay priority should be given to the development of agriculture. It may be noted, however, that transportation facilities (docks, barges, and the railroad) are considered to be inadequate, and loans in excess of $5 million may be sought for their improvement. In addition, power generation has been insufficient in the area around Asuncion, where a large part of the population is concentrated, and the area does not have an adequate water supply; foreign loans may be requested for these purposes within a few years.
4. Debt service capacity. As a point of departure, it may be noted that the NAC Working Group on debt service capacity of foreign countries suggested that Paraguay could service additional external dollar debt of about $4–6 million during the next four years. A recent IBRD staff report also concluded that Paraguay could assume some additional foreign debt service charges, although its creditworthiness in dollars is rather tight.
[Page 1577]The largest element of service on outstanding debt is in cruzeiros on two Brazilian loans, one of which Paraguay hopes to settle for local currency without actual transfer of foreign exchange. Even if this is done, Paraguay’s cruzeiro service requirements will be far greater than its 1949 or 1950 cruzeiro earnings. This service may require the use of dollars, therefore, unless Brazil, which in recent months has been short of sterling, would accept (with agreement on the part of the British) payment of part or all in pounds sterling. Total dollar and cruzeiro debt service in 1953–56 is expected to average from $1.47 to $2.25 million a year, equivalent to between 10 and 15.5 percent of Paraguay’s 1950 dollar and cruzeiro exchange receipts, the upper figures including full service on both Brazilian loans and the lower figures excluding the loan which Paraguay is seeking to renegotiate. The service schedule for the proposed IBRD loan would raise this service requirement by about $.4 million a year in 1954–56, or to 13–18.5 percent of dollar and cruzeiro receipts in 1950. In 1957–60, when the major part of the proposed loan would be retired, the total annual debt service (all in dollars or cruzeiros) would average about $2 million. To the extent that the increased production resulting from the loan program could be sold abroad for dollars, there would be an improvement in Paraguay’s ability to carry these relatively heavy debt service burdens.
Conceivably, of course, the dollar receipts of Paraguay might be in excess of its dollar requirements for imports and other purposes, in which case the more pertinent ratio might be the relatively low percentage between total debt service and total exchange receipts, rather than the high ratio in terms of dollars and cruzeiros. During 1950 and January–August 1951 Paraguay did in fact receive more dollars than it paid out. It should be noted, however, that this was possible only by means of stringency in exchange allocations, with a curtailment of dollar imports. It may be difficult for Paraguay to hold dollar imports to such a low level indefinitely. However, Paraguay’s dollar situation is expected to be improved by some $600,000 a year as a result of increased U.S. expenditures in Paraguay in cooperative and technical aid program over the next four years.
After full or partial default during 1932–44, Paraguay resumed service on its sterling debt on an adjusted basis in 1945, and the bonds were recently quoted in London about 63, to yield 6.4 percent to maturity at the call price of 70. Service on the two Export–Import Bank credits was usually in arrears from August 1943, until a maximum of arrearages was reached of $950,000 in January, 1951. However, this sum was accumulated almost entirely over the period August 1949–January 1951. Even in this period token payments were continued. As a result of strenuous effort, this arrearage was liquidated and payments became current in July, 1951. Paraguay has a small ($34,000) lend-lease obligation on which no payment has been made since 1945.
[Page 1578]5. Paraguay’s international economic position. Paraguay’s gold and foreign exchange holdings rose from $3.1 million at the end of 1949 to the equivalent of $12.5 million to the end of 1950 and the equivalent of $20.6 million at the end of September, 1951, reflecting chiefly an increased value of exports, a decline of imports and an accumulation of Argentine pesos through non-trade transactions. At the end of August, 1951, the indicated holdings of dollars were $7.3 million, sterling holdings were equivalent to $3.6 million and holdings of Argentine pesos were equivalent to $8.1 million. Paraguay’s diversified exports of lumber, quebracho, cotton, meat, hides, tobacco, vegetable oils, etc., and the relative stability of the various items represent factors of strength in its balance of payments outlook. The present multiple rate system of Paraguay which was established in March, 1951, has produced better results than the previous system, although the domestic inflation may weaken the balance of payments if it is allowed to continue unchecked.
6. Paraguay’s domestic financial situation. Inflation has been extreme in Paraguay, the cost of living index rising almost 500 percent during the last six years. The inflation can be attributed almost entirely to an expansion of bank credit, especially to the extension of credit by the Bank of Paraguay to the Government. For the fiscal year ending June 30, 1952, the Government of Paraguay has budgeted revenues of Gs 140 million and expenditures of Gs 170 million, indicating an expected deficit of Gs 30 million. It is hoped, however, that with the assistance of technicians under the Point IV program4 the Government will be able to reorganize the Finance Ministry, institute tax reforms and improve its control over expenditures. Success in these matters would materially improve the long-run outlook for the balance of payments and for the ability of Paraguay to service additional debt.
7. Availability of U. S. materials. NAC approval of the consideration of this loan application would carry with it no assurance that the U.S. materials for which financing is sought will be available.5
- Master file of the documents of the National Advisory Council on International Monetary and Financial Problems (NAC) for the years 1945–1958, as maintained by the Bureau of Economic Affairs of the Department of State and preserved as item 70 of Federal Records Center Accession 71A 6682.↩
- William McChesney Martin, Jr.↩
- Neither printed.↩
- In Latin America Point IV technical assistance programs were administered by the IIAA.↩
- On December 4, 1951, the NAC advised the US Executive Director on the IBRD that it approved his consideration in the Board of Executive Directors a loan of $5,000,000 by the IBRD to Paraguay to finance the external costs of an agricultural development program; the Export-Import Bank concurred in the action, but expressed the view that the amount of the loan was excessive (Department of State NAC Files, Document No. 88, December 4, 1951, Dot 60 D 137, Box 369). The loan was publicly announced by the Board of Directors of the IBRD on December 7, 1951. Under the terms of the Loan Agreement, however, the loan could not become effective until the Crédito Agrícola de Habiiitación, one of the agencies to receive IBRD-financed goods for resale to Paraguayan farmers, improved certain of its financial procedures. In September 1952, after a number of reforms had been accomplished, the IBRD declared the loan effective up to the amount of $1,900,000. For further information, see International Bank for Reconstruction and Development, Eighth Annual Report to the Board of Governors, 1952–1953 (Washington, 1953), p. 35.↩