Paraguay has achieved impressive economic 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. Since 2003, 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 4.5 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.
Economic growth in Paraguay remains strong. According to the revised System of National Accounts (SNA) with the new base year of 2014, GDP increased 4.8 percent in 2017, half a percentage point higher than the previous estimate. The trend continued at the beginning of 2018: in the first quarter of the year, the economy expanded 4.1 percent, driven by private and public consumption (+5 percent and +9.4 percent respectively). Strong domestic demand led to higher imports (+5.8 percent) that outpaced exports (+3.9 percent). On the supply side, power generation (+7.7 percent), manufacturing (+5.4 percent) and services (+5.8 percent) were the fastest growing sectors. The monthly index of economic activity indicates that economic growth has likely remained solid in the second quarter, despite the crisis in Argentina.
Monetary policy remained consistent with the inflation objective. The Central Bank kept the policy rate unchanged at 5.25 percent (since August 2017). Consumer inflation was at 4 percent in July 2018, exactly at the Central Bank’s target. The flexible exchange rate regime continued to cushion external shocks, and foreign reserves remained at prudent levels even after the 8 percent decline since April on the impact of the Argentina crisis.
The Fiscal Responsibility Law (FRL) continued to support fiscal prudence. In January to July, the government executed the central administration’s budget with a deficit of 0.5 percent of GDP, consistent with the 1.5 percent deficit ceiling established by the law. After the double-digit growth in 2017, public investment decelerated notably in 2018. With small deficits, public debt remains among the lowest in the region.
Following the sharp slowdown in the pace of poverty reduction observed since 2013, official poverty rates recovered the downward trend in 2017. The official poverty rate fell by 2.5 percentage points (from 28.9 to 26.4) and the extreme poverty rate fell by 1.3 percentage points (from 5.7 to 4.4 percent), driven by the strong recovery of labor income. Income growth was high enough to compensate for the increased cost of the consumption and food baskets, which grew by 5 and 9 percent respectively. Given the very low incidence of extreme poverty in urban areas, the fall in extreme poverty is driven by the change in rural extreme poverty, which underwent a substantial change from 12 to 9 percent. The fall in total poverty was observed both in rural and urban areas.
Economic growth in 2018-2020 is expected to remain close to 4 percent with a larger contribution from domestic demand. Consumption is likely to increase to a rate closer to the overall GDP growth (and to exceed it in 2018). Fixed investment is projected to grow above 5 percent. With stronger domestic demand and given the economic woes of the main trading partners, higher import growth is expected to make the contribution of net exports negative and keep the current account in deficit.
The Central Bank and the new government, in place from August 2018, are expected to maintain prudent macroeconomic policies, anchored in the inflation targeting and the FRL. Inflation is projected to remain close to the target of 4 percent. The FRL continues to protect prudency of fiscal policy, while the SNA rebasing creates some additional fiscal space in nominal terms with the unchanged deficit ceiling of 1.5 percent GDP. However, while Paraguay has strong macroeconomic buffers – low sovereign debt and high international reserves – supported by prudent policies, crises and volatility in the neighboring markets increase the country’s vulnerability and risks to the outlook.
Given the response of poverty reduction to economic growth observed in the last few years, poverty is projected to go down, albeit at a slow pace. In 2018, still 18 percent of the population is expected to live under the US$5.5 poverty line. More pro-poor growth with stronger pathways to the incomes of those at the bottom of the distribution is needed to accelerate poverty reduction in Paraguay.
Poverty and Shared Prosperity
Since the early 2000s Paraguay has experienced substantial – though not uniform – poverty reduction and shared prosperity. Since 2003 total poverty fell by 25 percentage points and extreme poverty by 8 percentage points, reaching historic lows of 26% and 4% in 2017, respectively. In turn, the income of individuals at the bottom 40 percent of the population grew at an annualized rate of 4.5% (compared to 2.7% average growth).
While poverty reduction was faster than the regional average, the elasticity of poverty reduction to economic growth was rather low when compared with the average of the LAC region. This is consistent with the capital-intensive nature of the main drivers of economic growth (agriculture and energy) and was particularly evident towards the end of the period.
Between 2013-2016 social gains stagnated despite sustained macroeconomic growth: total poverty remained at around 28% while shared prosperity turned slightly negative (-0.5%). Behind this was a slow deterioration in labor market outcomes, as reflected in the falling share of household members contributing with positive labor income – mainly driven by female and young household members – as well as the end of labor income growth that was observed across all economic sectors. Over this period, public transfers played a critical role in protecting households from falling into poverty despite their limited coverage. In 2017, however, progress resumed. Consistent with the recovery in private per-capita consumption, household income increased driven by the growth in labor income. Income growth was pro-poor: mean household income grew by 5.3% while mean income among the bottom 40 percent did by 7.6%.
Last Updated: Oct 16, 2018