With nearly 7 million people, Paraguay is a small and open economy. Over the past decade, the Paraguayan economy grew at an average of 5%, a level of growth higher than that of its neighbors, although very volatile. This was due mainly to its heavy reliance on natural resources. Electric energy through the hydroelectric binationals Itaipu and Yacyreta, along with the highly productive and modern soy and livestock production are leading economic activities, having represented more than 70% of all Paraguayan exports in 2016.
Sustained economic growth helped reduce poverty and promote shared prosperity. Between 2003 and 2016, the income of the bottom 40% increased by an annualized growth rate of 4.3% and the proportion of Paraguayans who live on less than US$5.5 per day (Upper Middle Income Class Poverty Line) fell by half, from 40.5% to 20%. Progress stagnated towards the end of the period - poverty rates remained flat and shared prosperity turned slightly negative between 2013-2016, but the recovery in incomes observed in 2017 may mark the start of a new period of poverty reduction. Income inequality, though lower than in 2003, remains high and volatile.
In response to the economic and social challenges faced by the country, the government prepared the first National Development Plan for the period 2014-2030 around three pillars:
- Poverty reduction and social development;
- Inclusive economic growth;
- Inclusion of Paraguay in global markets.
Over the past decade, the country has made significant progress on the macroeconomic front after making important economic reforms, such as the Fiscal Responsibility Law (FRL), Inflation Targeting and the creation of a Fiscal Advisory Council.
The adoption of inflation targeting in 2011 has helped to maintain the stability of the price index and the exchange rate. A disciplined fiscal policy, which includes the application of a Fiscal Responsibility Law (FRL), has contributed to the consolidation of public debt, which is now one of the lowest in the region, around 22% of GDP.
As a result of these fundamentals, rating agencies upgraded the ratings of sovereign risk in Paraguay. Over the past two years, the improvement in solvency facilitated the access of Paraguay to international capital markets, as evidenced by the success of the 30-year sovereign bond issuance in 2018 at 5.6%.
Growth accelerated to 4% in 2016 and is expected to be above 4% in 2017 thanks to a good soy harvest and an increase in constructions and manufacturing production, with a small current account deficit and a fiscal deficit in line with the FRL target of 1.5% of GDP.
The implementation of major economic and structural reforms has made significant progress as well. The measures include the introduction of a fiscal rule, the VAT reform (increase of products in the agriculture and financial sector), the introduction of income tax and corporate tax on agricultural income; and the improvement of fiscal transparency. In addition, the approval of the Law on Access to Public Information was important to improve transparency in the public sector in the country.
Despite recent efforts to improve tax collection and modify the composition of public expenditure towards investment, taxation levels remain low and the quality of infrastructure and public services, inadequate. Challenges remain to improve governance, the business climate and formality.
Nevertheless, progress has been made on the social front, with a series of reforms in this area, including free access to primary health care and basic education and the expansion of conditional transfer programs to benefit vulnerable populations. However, the high levels of poverty and inequality remain major problems for development.
In terms of competitiveness, although there are slight improvements in the overall position according to the latest World Economic Forum, Paraguay is moving toward better performance in key indicators such as the development of the financial market, subscriptions to cellular telephony, and transparency of government policies.
Last Updated: Apr 17, 2018