Overview

  • 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

  • The World Bank is preparing a new Country Partnership Framework (CPF) for the period FY19 to FY23 that is aligned with the objectives of Paraguay’s National Development Plan 2030 (NDP) and the five-year strategy laid out by the incoming Administration

    The CPF is built around three focus areas: (i) promoting accountable institutions and an improved business climate; (ii) natural capital management and integration into sustainable value chains; and (iii) building human capital. In addition, recognizing that socio-economic progress is highly contingent on strengthening the social contract between the Government and the population, the CPF will also encompass a cross-cutting emphasis on transparency, results-orientation and accountability.

    Last Updated: Oct 16, 2018

  • World Bank (IBRD) financing helped to achieve the following results:

    Improved the agricultural productivity

    The Sustainable Agriculture & Rural Development Project (PRODERS), the main Government tool to fight rural poverty, has reached overall 240,000 beneficiaries corresponding to 48,251 households, who benefited from agricultural services, particularly technical assistance. A random sample of 1,029 households comprising beneficiaries from 2011 to 2016 who benefited from the estrategia campesina (strategy for farmers) recently took place and concluded that 24,875 poor households in Eastern Paraguay are expected to report an increase in real agriculture incomes by 2018. At the local level, the Project has also built significant capacity and commitment in more than 600 rural communities to plan and execute local development interventions. As a result, 180 indigenous communities prepared and are implementing socio-economic development plans by 2018, highly surpassing the target of 130 communities.

    Improved access to quality water and sanitation services

    The Water and Sanitation Sector Modernization Project has contributed to the rehabilitation of 57 km of water distribution networks and 8.4 km of sanitation networks in Great Asuncion. About 270,000 people, 10% of the population in the capital Asuncion have access to improved sanitation environment. The project has contributed to improve rural water and sanitation infrastructure, already benefiting 6,190 indigenous individuals, half of whom are women. In addition, the project has also supported the decentralization of the National Environmental Sanitation Services (SENASA), as well as the development of an action plan to support the Water and Sanitation Units of the municipalities in Chaco to ensure long-term technical, institutional and financial support to all indigenous communities.

    Improved road infrastructure in target areas, particularly benefiting the rural population

    The Road Maintenance Project expanded rural connectivity and helped strengthen government capacity to define investment priorities and develop efficient work programs aligned with existing budgets. Institutional improvements have also been supported by legal actions in five key areas: passage of a transit and road safety law; passage of law to amend the classification of road system; creation of a planning department in Minister of Public Works (MOPC); increase in toll rates to cover costs of the system; and creation of a department for transparency and public participation. The Project financed  improvements to about 141 km of unpaved roads and many bridges in the three targeted departments and contributed to the introduction of performance-based contracts, with three contracts implemented for a total of 624 km.

    Increased efficiency of the transmission network

    The energy supply through the transmission network has increased by 65 percent, from 3,000,008 KwH to 4,949,000 KwH. This increased efficiency has benefited 2.5 million people in the Asuncion Metropolitan Area, of whom approximately 15 percent are below the national poverty line. The project was successful in modernizing ANDE’s communication system (Sistema de Gestión Integral de Distribución Eléctrica (SGIDE)), which improved the quality of the access by reducing service cuts and repair times.

    Last Updated: Oct 16, 2018

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LENDING

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

*Amounts include IBRD and IDA commitments


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Additional Resources

Country Office Contacts

PARAGUAY +595 21 218 1000
España 2028 casi Brasilia, edificio Urano, piso 5, Asunción 1208
rgonzalezllamas@worldbank.org