¿POR QUE EL SISTEMA ACTUAL YA NO SE AUTOSUSTENTA?- ENTREVISTA CON EL MINISTRO DE ECONOMIA

Discussion on Economic Reforms in Paraguay

Introduction to the Minister's Perspective

• The conversation begins with the host welcoming Minister Carlos Fernández Valdovino, who expresses gratitude for being part of the program.

• The minister discusses the political fear surrounding electoral costs that may have hindered necessary reforms in Paraguay.

Complexity of Economic Reforms

• The minister emphasizes that the proposed reforms are complex and not unique to Paraguay; they are challenging globally.

• He highlights three significant laws passed: Superintendencia de Jubilaciones, Ley del Servicio Civil, and Caja Fiscal, noting their controversial nature due to their impact on many citizens.

Legislative Strategy and Timing

• Acknowledging public protests against pension reforms, he explains a strategic decision to present controversial laws separately over time rather than all at once.

• The minister expresses optimism about legislative progress, respecting the timelines set by Congress for approval.

Importance of Legislative Approval

• He stresses that having a law with media sanción (partial approval) compels stakeholders to engage more actively in proposing solutions.

• The minister addresses concerns about potential political backlash if reforms were rushed through without adequate discussion.

Public Understanding of Fiscal Issues

• There is a discussion about public perception regarding the urgency of fiscal issues; he argues that warnings about financial problems have been ongoing for years.

• Reflecting on past discussions at events like Basanomic, he reiterates persistent concerns regarding fiscal sustainability and economic growth.

Explanation of Caja Fiscal

• The host interrupts to clarify what "caja fiscal" means for viewers unfamiliar with it.

• The minister explains that caja fiscal functions as a social security system for public sector employees including military personnel, teachers, and judges.

Retirement Systems in Paraguay: An Overview

Understanding the Common Fund for Retirement

• The retirement system discussed is a common fund, specifically an IPS-type fund where all workers contribute and can withdraw upon retirement.

• Legally, there are two main types of funds: civil and non-civil. However, accounting-wise, there are six categories.

• The IPS has a standardized contribution requirement; typically, individuals must contribute for 30 years and reach the age of 62 to retire.

Disparities in Retirement Age and Contributions

• A significant issue arises with public sector employees who can retire after only 25 years of contributions, leading to disparities compared to private sector workers who must wait longer.

• This creates financial imbalances as some individuals retire much earlier than others while contributing less overall.

Financial Viability of the Pension System

• The financial model suggests that retiring after 25 years while expecting full benefits for another 25 years is unsustainable given life expectancy rates in Paraguay (77 years).

• In the public sector (IPS), there are currently ten contributors for every one retiree, which helps balance out payouts financially.

Challenges Faced by Public Sector Pensions

• Unlike IPS, the public pension system cannot infinitely grow its contributor base without increasing staff numbers significantly.

• Special regimes exist for military and police personnel allowing them quicker access to pensions without a minimum retirement age.

Impact on State Finances

• Military and police make up about 7% of total contributors but have a disproportionate impact on state finances due to their early retirement options.

• These groups account for nearly half of the $380 million deficit projected for 2025 within the pension system.

Funding Gaps and Taxation Issues

• The state covers shortfalls from pension contributions through general taxation, primarily funded by VAT (Value Added Tax).

• Approximately 85% of pensions paid out come from state funds rather than direct contributions from active members.

Breakdown of Contributors by Sector

• Civilian sectors include administrative staff, teachers, judges, etc., with varying levels of surplus or deficit impacting overall funding stability.

• Each group contributes differently; public employees show a positive surplus while judicial magistrates face deficits affecting sustainability.

Financial Challenges in Public Sector Pensions

Overview of Public Sector Financial Status

• The current financial situation shows that various public sectors are facing significant deficits: universities at 19, military at 76, police at 67, and teachers at 46. This indicates a single fund where surplus from public employees is used to cover deficits.

• By 2025, the financial situation worsened significantly. Previous surpluses were stored in the Central Bank and commercial banks for returns but could not cover the growing total deficit.

• Currently, there are approximately $200 million in reserves split between the Central Bank and commercial banks. These reserves are dwindling against a backdrop of increasing financial demands.

Implications of Dwindling Reserves

• Critics question the use of previously saved funds due to ongoing deficits. As reserves deplete, it becomes increasingly difficult to maintain funding for essential services.

• With only $400 million remaining and an estimated deficit of around $200 million in one sector alone, there is an urgent need for sustainable solutions as existing funds will soon be exhausted.

Pension System Concerns

• The looming crisis means that taxpayers may have to cover up to 85% of pensions for military and police personnel while also addressing civil sector deficits.

• There is a call for equitable pension reforms; all retirees should receive dignified pensions regardless of their sector. Current disparities create tension among different groups within public service.

Broader Social Security Issues

• Approximately 76% lack retirement benefits, highlighting a significant gap in social security coverage that needs urgent attention beyond just pension reform discussions.

• The discussion emphasizes the necessity for comprehensive national social security reform rather than piecemeal solutions focused solely on immediate fiscal issues.

Government's Role and Future Plans

• The government acknowledges the critical nature of these financial challenges (380 million per year). Proposals are being developed to address both immediate fiscal hemorrhaging and long-term social security needs.

• There is recognition that existing programs aimed at older adults require strengthening but must be approached separately from broader fiscal discussions regarding public funds management.

Representation and Awareness

• Many affected individuals do not realize how their purchases contribute indirectly to financing public services through taxes like VAT. This disconnect complicates efforts toward reform as those impacted often lack organization or representation in advocacy efforts.

• It’s crucial for government representatives to advocate effectively for unrepresented workers who contribute financially yet remain unaware of how systemic issues affect them directly.

Reform of Social Security in Paraguay

Discussion on the Balance of Retirement Contributions

• The reform aims to create a balance between those retiring and state contributions, highlighting the introduction of VAT as part of this discussion.

• Minister Carlos Fernández Valdovino emphasizes the need for a future debate regarding social security funding, comparing Paraguay's 2.5% GDP allocation to Italy's 16%.

Concerns About Tax Pressure and Resource Allocation

• There is concern about how to increase social security funding without raising fears about GDP interpretations; current tax pressure in Paraguay stands at only 11%.

• The limited state resources (11% of GDP) impact essential services like healthcare and infrastructure, leading to public dissatisfaction with government spending.

Infrastructure Funding Issues

• Questions arise regarding where toll revenues are allocated, with citizens expressing frustration over unfulfilled promises for road improvements despite toll collections.

• A private company has recently been contracted for road repairs after years of inadequate maintenance by the Ministry of Public Works, indicating mismanagement of funds.

Proposed Changes in Retirement Age

• The proposed reform suggests increasing the minimum retirement age from 57 to 62 years as a means to ensure a sustainable pension system. This change is seen as necessary due to demographic pressures on social security systems.

• Rights acquired under previous laws will be respected; individuals eligible for retirement under existing rules will not be affected by these changes. This assurance aims to alleviate fears among current employees, particularly police officers considering early retirement.

Negotiation Limits and Fiscal Responsibility

• The minister clarifies that their proposals are based on what is technically feasible given the current fiscal deficit situation, which they aim to stabilize around 0.5%-0.6% of GDP per year moving forward. Any further changes would need careful consideration due to potential impacts on this target deficit level.

Discussion on Fiscal Policy and Taxation

Overview of Deficit Management

• The discussion begins with the potential increase in the deficit from 5% to 8 or 9%, highlighting the need for political decisions regarding fiscal management.

• Acknowledgment of changes made by deputies that initially increased the deficit but were later adjusted back to 5%, indicating a dynamic legislative process.

Financial Implications of Policy Changes

• The speaker emphasizes that increasing retirement benefits (substitution rate from 70% to potentially 80 or 85%) will create an additional financial burden, stressing the importance of understanding long-term impacts on funding for essential services like medications and infrastructure.

• The decision-making process is framed as political, yet grounded in strict mathematical realities, underscoring the tension between policy aspirations and fiscal constraints.

Taxation Challenges and Opportunities

• Discussion shifts to taxation pressure in Italy, noted as one of the lowest globally. The speaker questions why there is resistance to revising this model despite its implications for revenue generation.

• It is highlighted that raising taxes would primarily affect those already paying them, suggesting a need for broader tax base expansion rather than increasing rates on existing taxpayers.

Revenue Growth Strategies

• Introduction of the National Directorate of Tax Revenue (DNI), which has improved tax collection efficiency, raising revenue from 10% to 11.3% of GDP through better compliance rather than higher rates.

• The conversation points out that new contributors have emerged within the tax system, indicating untapped potential for further revenue growth without necessarily increasing tax rates.

Comparative Economic Stability

• Reference to Brazil's economic challenges compared to Paraguay's stability suggests a competitive advantage for attracting investment due to favorable macroeconomic conditions.

• Discussion about reaching a target tax pressure level (12% GDP), while acknowledging limitations based on current exemptions and structural issues within Brazil’s taxation framework.

Investment Climate Considerations

• Emphasis on creating conducive conditions for investment as crucial for job creation; highlights that stable macroeconomic policies are essential alongside competitive taxation.

• Recognition that improving legal security and maintaining competitive taxes are vital components in fostering an attractive environment for investors.

Future Financing Sources

• Proposal to explore alternative financing sources such as Itaipú's tariff adjustments, which could enhance budget execution without relying solely on traditional tax increases.

Discussion on Taxation and Economic Competitiveness

The Challenge of Public Investment and Taxation

• The speaker critiques the approach of raising taxes as a simplistic solution to economic issues, suggesting it disproportionately affects the poor while benefiting the wealthy.

Wealth Disparity in Tax Contributions

• Reference is made to Warren Buffett's claim that he pays less tax than his secretary, highlighting systemic inequities where ultra-rich individuals can exploit loopholes to pay minimal taxes.

Reforming Tax Legislation

• A discussion on past tax reforms indicates that previous allowances for certain deductions have been eliminated, emphasizing the need for better revenue collection from a broader taxpayer base.

Addressing Fiscal Gaps

• The conversation shifts to identifying fiscal loopholes within existing legislation, particularly in tourism-related tax regimes that favor foreign over local consumers.

Competitive Pricing and Market Dynamics

• Concerns are raised about maintaining competitiveness with neighboring countries like Brazil, especially regarding consumer goods pricing influenced by Mercosur agreements.

Foreign Investment Trends in Paraguay

Current State of Foreign Investment

• A significant drop in foreign investment is noted, with statistics showing a 31% decline despite lower tax rates intended to attract investors.

Misinterpretation of Investment Data

• The speaker argues that current data from CEPAL may be outdated or inaccurate, affecting perceptions of Paraguay's attractiveness for foreign investment.

Redefining Foreign vs. Local Investment

• Clarification is provided on how investments by foreigners who establish residency should be classified as local investments rather than foreign direct investment (FDI).

Growth Indicators and Economic Outlook

• Despite challenges, there’s optimism as overall investment grew by 17%, contributing positively to GDP growth and indicating robust economic activity within Paraguay.

Economic Insights on Paraguay's Growth and Bitcoin

Current Economic Landscape in Paraguay

• The speaker questions why Paraguay's investment grade is low despite its competitive advantages, emphasizing the need for clarity on how this affects citizens.

• There has been a significant increase in employment, with nearly 200,000 more people employed compared to two years ago, highlighting economic growth since the second quarter of 2023.

• Acknowledges that while progress is evident, there remains a strong desire for further improvement among the population; poverty rates have decreased significantly from over 50% in 2002 to below 20%.

• Anticipates that upcoming statistics will likely show poverty levels dropping even further, indicating ongoing positive trends in economic conditions.

• Compares economic recovery to a marathon rather than a sprint, suggesting that sustained effort is necessary for continued progress.

Discussion on Bitcoin and Its Implications

• Transitioning to Bitcoin discussions, the speaker shares insights as a central banker rather than an economist, noting Bitcoin's role as a non-government-backed payment method.

• Emphasizes the importance of transparency regarding investments in Bitcoin and warns potential investors about market volatility and risks associated with price fluctuations.

• Highlights concerns about public perception of Bitcoin investments due to significant price drops; stresses the necessity for investor education regarding potential losses.

• Discusses how various governments are beginning to hold reserves in Bitcoin, citing examples like Texas and El Salvador adapting their financial strategies accordingly.

• Explains that Bitcoin was created by the private sector to avoid government interference; central banks are now trying to adapt by incorporating it into their frameworks.

Legal and Market Considerations

• Raises concerns about legal implications for central banks investing in volatile assets like Bitcoin due to potential accusations of mismanagement or damage to public funds.

• Points out that while other assets fluctuate (like gold or dollars), Bitcoin’s volatility poses unique challenges for public institutions managing reserves.

• Notes that major financial institutions are starting to accept limited exposure to Bitcoin within investment portfolios as they adapt to its growing presence in global finance.

Economic Implications of China's Actions

The Impact of Tariffs and Asset Prices

• China is facing significant challenges, particularly regarding tariffs imposed by other countries. This situation can weaken a nation's state if asset prices begin to decline.

Global Market Reactions

• If China sells its treasury bonds, the value of these assets decreases, prompting widespread selling among investors, leading to a market crash. This phenomenon affects not just one country but multiple nations.

U.S. Dollar Weakness and Competitiveness

• All American assets are currently suffering due to global economic shifts. A weaker dollar makes U.S. products cheaper for foreign buyers, enhancing competitiveness in international markets.

Trade Dynamics with Argentina

• The trade relationship between Paraguay and Argentina has shifted dramatically over the past two years, with more Argentinians now shopping in Paraguay than vice versa.

Diplomatic Relations with China

• There is a call for Paraguay to establish direct diplomatic relations with China to capitalize on their demand for agricultural products like soy and meat.

Navigating Diplomatic Relationships

Balancing Trade and Diplomacy

• Establishing commercial ties with China should not come at the expense of relationships with other nations like Taiwan; both can coexist without conflict.

Personal Perspectives on Business Relations

• The speaker emphasizes that business dealings should be separate from personal friendships, advocating for open trade while maintaining social connections elsewhere.

Potential Economic Benefits from China

• Engaging economically with China could significantly benefit Paraguay's economy given the current trade imbalance favoring imports from China over exports.

Current Trade Practices

• Companies like Cofco are already involved in Paraguayan agriculture, indicating potential growth areas within this partnership that could be further explored.

Cultural Connections Amidst Economic Strategies

Importance of Cultural Ties

• While pursuing economic opportunities with China is essential, maintaining cultural ties (like those with Taiwan) is equally important for personal relationships and community engagement.

Future Directions for Paraguay's Economy

• The speaker advocates for establishing formal diplomatic relations with China while continuing to engage culturally and commercially with Taiwan as part of a balanced approach to international relations.

Discussion on Taiwan's Sovereignty

The Importance of Taiwan's Identity

• The speaker emphasizes the necessity of breaking ties with Taiwan, suggesting a deeper connection to its land and identity.

• Acknowledgment is made regarding the complexity of the situation, hinting at broader implications for all involved parties.

• Gratitude is expressed towards the speaker for their insights, indicating a respectful dialogue about sensitive topics.

• There is an anticipation of hearing from teachers who hold their own perspectives, suggesting a multi-faceted discussion ahead.

• The program aims to create a comprehensive understanding by integrating various viewpoints into future discussions.