Paraguay looks at sovereign wealth fund ahead of Itaipú windfall

Landlocked South American country Paraguay is looking at the possibility of creating a sovereign wealth fund as part of a possible adjustment of its fiscal responsibility law, deputy finance minister Humberto Colman Castillo told GlobalMarkets.

  • By Oliver West
  • 24 Mar 2018
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Paraguay needs to be preparing for 2023, when the debt contracted to build the Itaipú hydroelectric damn, a venture jointly owned by Brazil and Paraguay, will be repaid, said the deputy minister. 
Debt payments account for roughly two thirds of Itaipú’s $4bn annual revenues, meaning Paraguay will likely see a significant windfall once the debt is repaid — even if the exact amount is not yet defined given the treaty governing the damn is also up for renegotiation in 2023.
Some estimates put the windfall as high as $1bn for Paraguay — roughly 3% of GDP.  
“We will probably see an important windfall of resources in 2023 and Paraguay needs an institutional framework that allows it to spend these resources in a rational fashion,” said Colman Castillo.
The government already has some “well designed ideas” on how a sovereign wealth fund might work, said the deputy minister.
“Looking ahead to the prospect of fiscal surpluses in the future, a sovereign wealth fund may help us smooth out public spending,” he said.
“It is something that the next government will have to define and it could be part of Fiscal Responsibility Law 2.0.”
Paraguay will hold presidential elections on April 22, with incumbent Horacio Cartés ineligible for re-election. Few are expecting the eventual winner to deviate far from the country’s macroeconomic policies, which have led to several rating upgrades during Cartés’ time in charge.
Whichever course they follow, the new government will have to spend time preparing for 2023, given the sums of money likely to be involved.
Fiscal Responsibility Law 2.0, as the finance minister calls it, is also likely to include greater flexibility to spend more during dips in the economic cycle and save more during peaks.
This would have allowed the government to better deal with a dip in government revenues due to neighbouring Brazil’s economic crisis in 2015, said Colman Castillo. 
“We are very content with the impact the fiscal rule has had, but in the medium to long term we are a bit concerned about the pro-cyclical bias these laws have,” he added. 

  • By Oliver West
  • 24 Mar 2018

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