Paraguay has achieved impressive economic growth and shared prosperity over the last 15 years. The economy grew at 4.5 percent per year on average (2004-2017), faster than most of its regional comparators. This growth has been accompanied by poverty reduction. Over the same period, total and extreme poverty have fallen by 49 and 65 percent, respectively. Overall, Paraguay’s reduction in poverty was larger than the regional average, though not as strong when considering the rate of economic growth. There has also been fast income growth among the bottom 40 of the population, which grew at 4.2 percent annually over 2003-2017. The middle class has almost doubled since 2003, becoming—at 38 percent of the total population in 2015—the second largest group, just below the vulnerable population.
After a strong performance in the first half of 2018, economic growth in Paraguay decelerated in the second half of the year due to suboptimal performance of the main trading partners, especially Argentina. Following a 5.4 percent expansion over January-June, GDP increased by 1.3 percent year-on-year in the second half, with the annual growth for the whole 2018 of 3.6 percent. The monthly index of economic activity indicates that economic growth has likely remained sluggish in the beginning of 2019.
Inflation decelerated close to the lower bound of the target range in recent months, but monetary policy remained consistent with the inflation objective. Consumer inflation decelerated to 2.4 percent y/y in January 2019. Therefore, on February 22, the Central Bank moved to a more accommodative stance and lowered the policy rate by 25 bp to 5 percent (previous rate unchanged since August 2017). The flexible exchange rate regime continued to cushion external shocks, and foreign reserves remained at prudent levels, recovering after the temporary decline from the impact of the Argentina crisis. Central Bank data, recently revised, indicates that Paraguay had a current account surplus of 3.1 percent of GDP in 2017, underscoring solid fundamentals.
With public debt among the lowest in the region, Paraguay’s Fiscal Responsibility Law (FRL) continued to support fiscal prudence. In 2018, the government executed the central administration’s budget with a deficit of 1.3 percent of the re-estimated GDP. However, after the double-digit growth in 2017, public investment decreased by 11.8 percent in 2018, while the public wage bill increased by 9.5 percent. Meanwhile, international investors showed confidence in Paraguay’s overall macroeconomic management and outlook, when in February 2019 the government placed US$500 million as a 31-year Eurobond at 5.4 percent.
Economic growth in 2019 is expected to be below 4 percent. The deceleration of economic activity that started in the second half of 2018 is likely to continue throughout the first half of 2019. In addition to the impact of Argentina’s slowdown and slightly weaker global growth prospects, the recent drought is expected to reduce the harvest of one of the key agricultural products. In 2020-21, the pace of expansion is projected to return to its potential of 4 percent. The authorities are expected to maintain prudent macroeconomic policies, anchored in the inflation targeting and the FRL. Inflation is projected to return to the mid-point of the target range of 4 percent by end-2019. The current account surplus is expected to gradually shrink over 2019-21. Although Paraguay has built strong macroeconomic buffers—low sovereign debt and high international reserves—supported by prudent policies, crises and volatility in the neighboring markets may increase the country’s vulnerability and risks to the outlook. Moreover, concentration of exports in a few agricultural products continues to make growth vulnerable to fluctuations in commodity markets and to weather related shocks.
Poverty and Shared Prosperity
Since the early 2000’s Paraguay has experienced substantial poverty reduction and shared prosperity. Measured as the share of individuals living on less than 2011 PPP US$5.5 per day, the poverty rate in 2017 is less than half of what it was in 2003, and the income of individuals at the bottom 40 percent of the population grew at an annualized rate of 4.2 percent (compared to 2.5 percent average growth). With 40 percent of the population living in rural areas Paraguay is the least urbanized country in South America - the poor are evenly split between rural and urban areas, and progress took place in both.
However, the pace of poverty reduction has markedly slowed down since 2013, with international poverty rates remaining at around 20 percent. In rural areas, the impressive growth of commercial agriculture has not been mirrored by family-based agriculture; in urban areas job creation was mostly in low-productivity sectors, especially services. Overall, poverty reduction since 2003 was faster than the regional average, but the elasticity of poverty reduction to economic growth was rather low when compared with the average of the LAC region.
Official statistics show that poverty continued to fall in 2018. At the same time, extreme poverty – largely a rural phenomenon, remained stagnant at around 10 percent, driven by the fall in private transfers. The projected deceleration in economic growth, together with the economic crisis in Argentina - already reflected in a significant fall in remittances, suggests that poverty reduction is expected to remain low in coming years.
The country faces important challenges to the sustainability and expansion of its social gains. Most people in rural areas still rely on family agriculture, which puts them at higher risk of being poor. Similarly, income growth volatility among the bottom 40 percent in urban areas is also high, while urban safety nets are weak. Without improvement in current indicators of human capital, prospects for improving labor productivity growth are modest. Health outcomes have improved, but lag progress relative to comparators, while education quality remains insufficient: comparative test scores place Paraguay at levels similar to those of lower-middle income countries.
Last Updated: Oct 15, 2019