Paraguay

Paraguay is one of the poorest and most unequal economies of South America: 23.5% of the population lives below the national poverty line, according to the World Bank. Yet, GDP growth has been dynamic and above the regional average since 2013, driven by domestic demand but also gains in terms of trade that supported agriculture and hydropower exports. In addition, institutional reforms such as the inflation-targeting mechanism and fiscal responsibility legislation helped to ensure macroeconomic soundness and sustain growth. Paraguay’s structural vulnerabilities stem from a reliance on the agriculture sector, which leaves it exposed to commodity-price shocks and adverse weather conditions.

The country was able to weather the Covid-19 pandemic relatively better than its neighbors, with a limited number of deaths and cases. After two consecutive years of GDP declines, Paraguay’s economy rebounded by +4.2% in 2021, thanks to a recovery in the secondary and tertiary sectors and despite contractions in agricultural production and electricity generation. Looking ahead,Paraguay will face tighter financial and monetary conditions, as well as adverse weather conditions – in particular, La Niña is expected in late 2022 and early 2023, which could cause droughts and heatwaves that will affect agriculture production and growth in the short term. Overall, after a substantial slowown in 2022, we expect economic growth to rebound to +4.0 % in 2023.

Given its dependence on imports and vulnerability to weather conditions, Paraguay is one of the Latin American countries most affected by global inflation. Inflation is projected to decelerate as commodity prices moderate, monetary policy tightening takes effect (The Banco Central del Paraguay increased interest rates to an all-time-high of 8.5% in October) 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 (2-6% range in 2023).

The ruling right-wing Partido Colorado (PC) has a strong legislative mandate, which bodes well for governability and its bid to win another five-year term in 2023. However, with one year left of his term, President Mario Abdo will face challenges to political stability. Even though protests caused by popular discontent over fuel-price increases have waned after the governmented granted fuel subsidies, persisting inflationary pressures will sustain the risk of further protests and continued political instability.

Paraguay’s business climate remains weak. According to the 2020 World Bank Doing Business survey, the country ranks 125th out of 190 on ease of doing business. The country’s main shortcomings include starting a business, protecting minority investors and getting credit. The government pursues the pro-market policies enacted by the former head of government Horacio Cartes to lower taxation and attract foreign direct investment. For the medium term, the government has identified private sector investment, as well as public-private partnerships (PPPs), as the engines of sustained economic growth. Improvements to the country's business environment will be necessary if these are to come to fruition.