With nearly 7 million inhabitants, Paraguay is a small and open economy. Over the last decade, the Paraguayan economy grew at an average of 5% - higher than its neighbors but very volatile. This has been mainly due to its heavy reliance on natural resources. Electric power, through the binational hydroelectric plants of Itaipú and Yacyretá, and highly productive and modern agriculture and livestock production are leading economic activities accounting for more than 60% of all Paraguayan exports in 2015.
Sustained economic growth helped poverty reduction and shared prosperity. Income of the bottom 40% increased by 8% annually between 2009 and 2014 and the proportion of Paraguayans living on less than US$4.0 a day (the regional poverty threshold) fell from 32.5% to 18.8%. However, poverty and income inequality remain a major challenge.
In response to the country’s economic and social challenges, the government prepared the first National Development Plan for the period 2014-2030 around three pillars:
- Poverty reduction and social development;
- Inclusive economic growth;
- Paraguay’s inclusion in global markets.
It also supports a medium-term economic framework emphasizing sustainable fiscal policies; improved tax collection; increased effectiveness of social protection policies and their targeting; and broader financial inclusion.
Recent macroeconomic developments and outlook.
Growth decelerated to an estimated 3% in 2015 and is expected to remain at 3% in the wake of the commodity price slump, with moderate fiscal and current account deficits. This reduction mainly reflects the decline in international commodity prices and adverse weather conditions, which directly affects the value of Paraguayan exports. International prices are expected to remain flat in 2016 and 2017 for soybean and decline further for beef. Lower commodity prices will translate into a current account deficit of 1.7% of GDP in 2015 and 2016. The budget deficit in 2015-2016 is expected to slightly above the deficit ceiling under the FRL. Moreover, the slowdown of emerging markets, Brazil and Argentina in particular, which account for 40% of exports and are the main source of FDI, could weigh down on the outlook going forward.
Recent structural reforms and remaining challenge in the reform agenda.
Over the past decade, the country has made significant progress on the macroeconomic front with the implementation of major economic reforms, such as the fiscal responsibility law and inflation targeting. As a result, public debt continues to rise but remains among the lowest in the region. Despite recent efforts to enhance revenue collection and shift the composition of public expenditures toward investment taxation remains low and the quality of infrastructure and services inadequate. Challenges remain to improve governance, business climate, and formality.
Similarly, progress has been made on the social front, with a number of social reforms including free access to primary health care and basic education and the expansion of conditional cash transfer programs to benefit vulnerable populations. Nevertheless, high levels of poverty and inequality remain significant development challenges.
Last Updated: Apr 05, 2016