Skip to Main Navigation

Overview

Sound macroeconomic policies have benefited Paraguay’s economy over the past two decades. From 2004 to 2019, Paraguay grew faster, recorded smaller fiscal deficits, and borrowed less than its peer countries. Much of this growth reflected favorable terms of trade that supported agriculture and hydropower exports, but institutional reforms such as the inflation targeting mechanism and fiscal responsibility legislation (FRL) helped to safeguard macro stability and sustain growth.

Poverty (US$6.85 per day per capita, 2017 PPPs) fell from 40.2 to 19.7 percent, while inequality fell from 54 to 46 Gini points during the same period. Using data from before the pandemic, the World Bank Human Capital Project estimated that a child born in Paraguay would only attain 53% of the productivity that she could have achieved with full access to health and education. This result is lower than the regional, and upper middle-income averages.  

More recently, multiple external shocks have suppressed growth and poverty reduction. The economy contracted in 2019 due to droughts and poor trading partner performance, and subsequently in 2020 due to mobility restrictions associated with COVID-19. The latter led poverty to increase to 22.3 percent in 2020 despite additional social transfers. In 2022, the drought-induced recession and inflation are expected to lead poverty to remain higher than pre-pandemic levels.

With weather shocks projected to be more frequent and intense under climate modeling, structural reforms are needed to boost productivity and resilience. These include strengthening governance and capacity to enforce regulations, and spending more on human capital and infrastructure, especially to adapt to climate change. To finance such investments, Paraguay needs to raise more domestic revenues in a fair and efficient manner, while improving the overall quality of public spending. It also needs to mobilize more private capital, which will require stronger sector regulation and cost recovery of services through consumer tariffs.

The economy is expected to contract by 0.3 percent in 2022 due to the recent drought, coupled with tighter monetary and fiscal conditions. Assuming favorable weather during the soy planting season in Q4, a strong recovery of 5.2 percent is projected for 2023. Fixed investment is expected to remain firm as public and private works progress. 

Inflation is projected to decelerate as commodity prices moderate, interest rate hikes take effect and household utility bills decline following energy tariff reductions. In 2023-2024, inflation is expected to return to the upper bound of the target range.

The current account balance is expected to deteriorate due to lower soybean exports and higher fuel imports. It is projected to remain in a small deficit in 2023-2024 as import growth accelerates in line with

fixed investment growth. Despite US monetary policy normalization, the financial account is expected to remain stable as residents mainly own domestic currency dominated assets.

Public finances are expected to remain on a consolidation path. Reforms to improve the efficiency of public procurement, civil service wages, and pensions have been proposed, but not moved in Congress. With no new revenue reforms planned, a larger consolidation of personnel and capital spending is expected as the government strives to reach the FRL deficit target of 1.5 percent of GDP in 2024. The debt ratio is expected to increase due to the contraction in GDP in 2022 but fall thereafter. 

With the recession and high inflation depressing real disposable incomes, poverty is expected to increase to 21.5 percent in 2022. The effects of the war in Ukraine on regional growth and the slow recovery of labor markets may drive poverty higher. Better-targeted social protection programs would help cushion the impact of future crises.

The projected recovery may be adversely impacted by bad weather or by political/economic uncertainty domestically as well as in Brazil and Argentina. Given that only half the population is fully vaccinated against COVID-19, more severe outbreaks may dampen growth and poverty reduction.

Last Updated: Oct 03, 2022

LENDING

Paraguay: Commitments by Fiscal Year (in millions of dollars)*

*Amounts include IBRD and IDA commitments

Country Office Contacts

PARAGUAY +595 21 218 1000
España 2028 casi Brasilia, edificio Urano, piso 5, Asunción 1208