How will your tax reform improve the system?
Benigno López: I believe it was Churchill that said when you think about future generations you are doing the right thing. Well the benefits of this reform will be felt by my successor and the next government of Paraguay because it will take up to five years for it to achieve its full effect. Don’t get me wrong, the state’s tax take will increase next year, but there are many different mechanisms that this law improves and it will be between three to five years before we see the complete increase in fiscal revenues.
Our tax reform is just one piece of wider, structural changes that this country needs to ensure economic growth and spread the benefits of that growth more fairly among our population. It’s not a radical change to the tax system, as the overall burden on companies remains at 10%, meaning we still have the lowest tax in the region. But we are eliminating tax deductions for the highest earners, which is a progressive move that improves income equality. The extra revenues the reform generates will be earmarked directly for investment in health, education and infrastructure, which is why it is part of the more general reform effort. Finally, there are some technical measures, which might not generate headlines but should help improve the system. For example, we will be able to share information with other institutions so that we can fight tax evasion and the informal economy.
Explain the government’s ambitious reform programme.
BL: The Ministry of Finance, works with other key ministries to deliver structural reforms across the Paraguayan economy. The three main areas that we focus on are health, education and infrastructure. It’s important to note that Paraguay has been on the path of reform for almost 20 years. In the early 2000’s we were a country with lots of problems. We were in selective default with a debt-to-GDP ratio above 50% and more than half of our population living in poverty. But now we’re a different country. We are almost investment grade – indeed if you look at our borrowing rates our government receives the market already treats us as such. Our debt-to-GDP now stands at 22% while poverty is 27%. For the first time in our history we have a real middle class, which creates demand. Paraguayans now expect more from their country. They want public services to be of a better quality, which is why this country is now embarking on the next stage of reform. The idea is that we will be an even better country in the next 20 years.
[quote] In the early 2000’s we were a country with lots of problems…[/quote]
We don’t want to lose the country’s hard-earned macro stability but we realise that we need to spread the wealth being created among more of our citizens. The most effective way for us to do that is through improving health, education and infrastructure.
This is about changing the lives of people. We know that with the 4th industrial revolution our workers will need to be better prepared. So that is our big priority. We are also working with the Minister of Health to improve health services in the country. At the moment we have two key providers: the Ministry of Health and the Institute of Social Security. We need to find a way for them to work more closely with each other. Finally, in infrastructure, we are developing new mechanisms for the state to procure infrastructure. The two new models are public private partnerships and turnkey. We have two PPP projects that are currently being built and they will pave the way for more private-sector investment. We have an ambitious infrastructure programme that will help us trade with the world. In the past, we only had one bridge with Brazil, by the end of this administration we will have four. We are also building a new bridge to Argentina. While the bi-oceanic corridor will place us on a crucial highway linking the Pacific ports of Chile with the Atlantic coast of Brazil.
As a fiscally-responsible country we have limited public-sector capacity for funding these reforms. So, we need to improve the efficiency of the state, increase revenues and attract private sector investment.
How can Paraguay attract the new type of investors needed to drive it into the next stage of development?
BL: We are in a fortunate position because we have a lot of the natural assets that attract investors. For example, we have a young population, a growing workforce and abundant, low-cost renewable energy. We are a small nation with just 8 million people in a land the size of Germany, so the potential for growth is enormous. However, we need to improve our governance so that world-class investors feel comfortable investing here. For example, we need to demonstrate that our judicial system is independent and fair. We also need to fight money laundering, so there is no reputational risk for international companies here. We also need to improve our international standing and links. For example, we don’t have a direct flight to the US. Even some businesspeople in neighbouring countries, such as Argentina, don’t know much about Paraguay. It’s crazy because we have a privileged position in the southern cone of Latin America. Asuncion is around 2 hour’s flying time from the most important cities of the region: Santiago, Buenos Aires, Montevideo, Rio and Sao Paulo.
Fortunately, this government is already making important progress on these measures. Even the political opposition have hailed the recent selection of Supreme Court judges as transparent and competitive. We’ve boosted the fight against organised crime, with major drug seizures under this administration. We have also revamped our anti-money laundering legislation with 12 AML laws passed last year. The digital government initiative will also cut corruption and improve the business environment. At the moment 90% of state processes are carried out on paper, which shows how much there is to do.
How will Paraguay balance the nation’s health and economic needs while fighting coronavirus?
BL: It’s a tough challenge but hopefully we have a few factors in our favour. We reacted very early and were one of the first governments in Latin America to close schools and start social distancing measures. We also have experience in dealing with epidemics and our health minister dealt with a recent dengue outbreak very well. Of course, this is new for the whole world and nobody knows what measures we will have to take in the future but, so far, we have been ahead of the curve.
There are also some natural advantages. Our young demographic means that less of the population should require critical care, while there are early signs that the virus may spread more slowly in hot southern climates than in cool northern ones.
But I am not trying to downplay the severity of the situation. There is no doubt this is a serious economic challenge for Paraguay. In particular our exports are suffering because commodity prices are down. Meanwhile, as a small, open economy we rely on international imports that will also be reduced as factories around the world are shut. The real challenge for Paraguay will be on the economic front. I hope that as the developed economies recover, they can take the measures to kickstart global trade.