In 1982 Paraguay experienced its first balance-of-payments deficit in twelve years, which was followed by at least five years of consecutive deficits. Balance-of-payments deficits were the direct result of the mushrooming merchandise trade deficit and the decreased level of private capital investment, both the legacy of the 1970s, when large surpluses on the capital account more than made up for current-account deficits. The balance-of-payments situation became quite fragile in the late 1980s. Expectations of rectifying the country's international accounts centered around a reversal of the declining terms of trade, increased electricity exports, continued devaluations of the guaraní, and renewed capital inflows associated with Yacyretá.

Chronic deficits on the current account, primarily trade deficits, were the prime reason for the poor performance of the country's balance of payments. The nation's trade deficit grew from US$10 million in 1970 to US$57 million in 1975 and US$527 million in 1986. Over the same period, debits on the service portion of the current account were negative but to a lesser extent. Growth in tourism in particular served to lower the services deficit after 1982. Net transfers played only a minimal role in the current account.

Large surpluses on the country's capital account offset current account deficits until 1982, when exports and capital inflows began to slow. Most capital inflows in the 1970s and 1980s were related to Itaipú and later Yacyretá, and their special role earned them separate entries on the balance of payments. Capital account surpluses in the 1970s and early 1980s increased Paraguay's international reserves to a high of US$781 million in 1981, or roughly seven months of imports. The country's largest balance-of- payments deficit occurred in 1982. This was financed from accumulated reserves, as were the five years of deficits that followed. In 1986, during the post-Itaipú recession period, reserves declined to US$377 million, the equivalent of less than four months of imports. Unlike many Latin American countries in the 1980s, however, Paraguay had amassed sufficient reserves in the 1970s to finance its balance-of-payments deficits. Paraguay did not have to draw on IMF or other external resources to weather its deficits.

Foreign direct investment in Paraguay in the 1970s and 1980s, the source of capital account surpluses, was mostly in hydroelectric development, banking, and Law 550 companies. The most striking feature of foreign investment was the growing dominance of Brazil, which represented one-fifth of all foreign investment and 72 percent of Latin American investment in Paraguay. The Banco do Brasil became one of the country's leading creditors, financing 80 percent of Itaipú, 100 percent of the steel company Acepar, and considerable agribusiness investment in the eastern border region. West Germany followed Brazil and was particularly involved in banking and Yacyretá. The United States was the third largest foreign investor, with a portfolio of banking, petroleum exploration, and agribusiness. United States capitalc77 al was dominant among Law 550 firms. Other major foreign investors included Argentina, Japan, France, and Italy.

Paraguay weathered the Latin American debt crisis of the 1980s rather well. As the fastest growing economy in Latin America for most of the 1970s, Paraguay prospered while many of its neighbors struggled. Paraguay's debt grew from under US$200 million in 1972 to US$842 million by 1980, but with rapid growth in GDP, debt as a percentage of GDP remained approximately 15 percent. Unlike many neighboring economies in the 1970s, which borrowed to compensate for balance-of-payments deficits or inefficient state-owned enterprises, Paraguay's minimal lending generally went toward productive investment in infrastructure, hydroelectricity, and agriculture. Because Brazil carried the overwhelming share of the debt burden of Itaipú, even that large investment did not greatly indebt the country. Furthermore, about 80 percent of Paraguay's debt was with official creditors, not commercial banks, allowing for greater flexibility and more favorable terms of loan repayment. Latin America as a region, by contrast, owed more than 70 percent of its debt to commercial banks in 1987.

Paraguay's debt, however, grew rapidly in the 1980s, at the second fastest rate in Latin America. From 1980 to 1987, the country's indebtedness more than doubled, to roughly US$2 billion. Because of Paraguay's slow economic growth during that period, debt as a percentage of GDP spiraled to above 50 percent. Over the same period, Paraguay's debt-service ratio--total debt-service payments as a percentage of exports of goods and services--swelled from 19 percent to 37 percent. Paraguay's rapidly growing debt in the 1980s mirrored that of its neighbors for the first time in the sense that loans were destined primarily to cover the capital and operating costs of state-owned enterprises. The central government and stateowned enterprises were responsible for almost equal shares of nearly 90 percent of the country's external debt in the 1980s. In 1986 the government was unable to make its payments on a debt to Banco do Brasil rescheduling this debt blemished Paraguay's previously untarnished credit rating. In the late 1980s, analysts expected Paraguay's national indebtedness to grow.

Data as of December 1988