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Paraguay - Economy

Paraguay's economy relies on agriculture. It features bloated but weak state institutions and the heavy involvement of state-owned enterprises. There is considerable activity involving the trading of imported legitimate goods, contraband and counterfeit products, most of which are destined for Brazil or Argentina. For Paraguay to escape from the poverty affecting roughly half of its population, the country needs to increase productivity by attracting capital and raising annual growth rates closer to 5 or 6 percent. Success will require the government to stay the course on macro economic stability and undertake deeper structural reforms. The country is home to one of the most unequal rates of land distribution in the region with an estimated 77 percent of land in the hands of just 2 percent of the population. The trend of inequality was consolidated under the dictatorship of Alfredo Stroessner, whose regime allowed political and economic elite to seize illegally vast swaths of campesino land during his 35-year rule that ended in 1989.

Paraguay has a small but rapidly growing open economy with a strong macroeconomic position and the potential for continued growth over the next decade. Major drivers of economic growth in Paraguay are the agriculture, retail, and construction sectors. The Government of Paraguay (GOP) encourages private foreign investment. Paraguayan law grants investors tax breaks, permits full repatriation of capital and profits, supports maquila operations, and guarantees national treatment for foreign investors. Standard & Poor’s, Fitch, and Moody’s all upgraded Paraguay’s credit ratings over the three years 2012-2015.

Paraguay’s economy remains relatively resilient against the backdrop of a regional slowdown. Growth is estimated at 3 percent in 2015, among the strongest in Latin America. This reflects a milder terms-of-trade shock relative to comparators; stable growth in investment and consumption; and modest fiscal stimulus. However, the economy experienced some loss of momentum over the past year. Growth below potential helps contain inflation pressures, including from past exchange rate depreciation. Inflation was expected to decline to the mid-point of the central bank’s target range (4.5 percent) over the course of 2016.

The external position deteriorated in 2015, due to a negative terms-of-trade shock and weakness in major trading partners. Furthermore, credit growth has moderated from a rapid pace, as economic activity has slowed and financial conditions have become less favorable. Credit quality has been deteriorating. Specifically, banks’ non performing loans have been rising, albeit from low levels, since mid-2015. Notwithstanding potential vulnerabilities from past rapid credit expansion, the financial system appears sound. Most banks posted positive net income in 2015, although profitability measures (returns on assets and equity) were in most cases below 2014 levels. Relative to the region, Paraguay’s banks compare favorably in terms of their balance sheets and profits.

Paraguay has embarked on an ambitious reform agenda to raise living standards and boost potential growth. The authorities’ national development plan (NDP) for 2014–30 rests on three axes: (i) poverty reduction and human capital development; (ii) infrastructure and inclusive growth; and (iii) insertion of Paraguay into global value chains. Deficiencies in transportation and electricity distribution are seen as key bottlenecks, constraining productive capacity and quality of public services.

The national development plan places emphasis on inclusive growth and poverty reduction. The authorities highlighted the “Sowing Opportunities” umbrella program aimed at poverty reduction and inclusive growth. It includes Tekopora, the longstanding conditional cash transfer program, as well as several new programs such as Tenondera, an income-generating program to empower those graduating from Tekopora; and Tekoha, a program to assist the poor to legally acquire property on which they live. At the same time, authorities noted that efforts have been made to improve targeting and coverage by collecting more information about the economic conditions of potential recipients via the “Ficha Social” survey.

Paraguay has a predominantly agricultural economy, with a struggling commercial sector. There is a large subsistence sector, including sizable urban unemployment and underemployment, and a large underground re-export sector. The country has vast hydroelectric resources, including the world's second-largest hydroelectric generation facility built and operated jointly with Brazil (Itaipu Dam). Paraguay is the world's largest net exporter of electricity. However, it lacks significant mineral or petroleum resources. The government welcomes foreign investment in principle and accords national treatment to foreign investors.

The economy is dependent on exports of soybeans (as the world’s fourth-largest exporter and seventh-largest producer), cotton, grains, cattle, timber, and sugar; electricity generation; and to a lesser extent on re-exporting to Brazil and Argentina products made elsewhere. It is, therefore, vulnerable to the vagaries of weather and to the fortunes of the Argentine and Brazilian economies. Given the importance of the informal sector, accurate economic measures are difficult to obtain.

In 2010, Paraguay experienced its fastest economic growth of the past 30 years. Globally, only Qatar and Singapore had a greater increase in GDP. Fueled by a significant rebound in the agricultural sector, which had contracted sharply in 2009 due to a severe drought, Paraguay’s economy grew 14.5% during 2010. Economic growth for 2011 was much more modest, with a rate of 6.4%. Paraguay’s 2011 GDP was estimated at $22.3 billion.

The account deficit increased from -0.22% of GDP in 2009, to -1.49% of GDP in 2010, to -7.5% of GDP in 2011. Official foreign exchange reserves were $4.17 billion for 2010 and $4.93 billion for 2011. Inflation was 7.2% for 2010 and 4.9% for 2011. Standard & Poor's has upgraded Paraguay’s long-term debt rating from B to B+.

Agricultural activities, most of which are for export, represent about 20% of GDP and employ about one-quarter of the work force. More than 250,000 families depend on subsistence farming activities and maintain marginal ties to the larger productive sector of the economy. In addition to the commercial sector with retail, banking, and professional services, there is significant activity involving the import of goods from Asia and the United States for re-export to neighboring countries. The underground economy, which is not included in the national accounts, may be almost twice the size of the formal economy in size, although greater enforcement efforts by the tax administration and customs are having an impact on the informal sector.

According to the Central Bank of Paraguay, Paraguay’s exports were $1.66 billion by April 2011. That was an 8.7% increase over exports as of April 2010. Imports as of April 2011 were $3.39 billion, a 26.9% increase over April 2010. In 2011 exports totaled $10.539 billion, while imports were $12.212 billion.

Paraguay suffers from an alarming rate of unemployment and underemployment. Questions were raised as to whether education was a major bottleneck to development in Paraguay and whether the small Paraguayan economy can appropriately accommodate an increased number of educated job seekers. Given the limited economic opportunities in Paraguay and the country’s limited growth potential, there was the possibility that heavy emphasis on education could result in the creation of an unemployed mass of demi-intellectuals.

An economic downturn in the early 1980s caused discontent, which in turn led to demands for reform. Many Paraguayans, no longer content to eke out a living on a few hectares, had to leave the country to look for work. In the early 1980s, some observers estimated that up to 60 percent of Paraguayans were living outside the country. But even those people who were willing to farm a small patch of ground faced a new threat. Itaipu had prompted a tidal wave of Brazilian migration in the eastern border region of Paraguay. By the mid-1980s, observers estimated there were between 300,000 and 350,000 Brazilians in the eastern border region. With Portuguese the dominant language in the areas of heavy Brazilian migration and Brazilian currency circulating as legal tender, the area became closely integrated with Brazil.

With a population growth rate above 3% per annum and 70% of the population below the age of 35, job creation to meet the large and growing labor force is one of the most pressing issues for the Government of Paraguay. However, the weak education system limits the supply of well-educated workers and is an obstacle to growth.

Paraguay’s labor code makes it very difficult to lay-off a formally registered, full-time employee who has completed ten consecutive years of employment. Firms often opt for periodic renewals of “temporary” work contracts instead of long term contracts. Paraguayan law provides for the right of workers to form and join independent unions (with the exception of the armed forces and the police), bargain collectively, and conduct legal strikes. The law prohibits binding arbitration and retribution against union organizers and strikers. While the law prohibits anti-union discrimination and sets the financial penalty, employers are not required by law to reinstate workers fired for union activity, even in cases where labor courts fine firms for anti-union discrimination.

The government did not effectively enforce the law, often failing to prevent retaliation by employers who took action against strikers and union leaders. Penalties for violations included fines ranging from 10 days’ to 30 days’ wages, or approximately Gs. 700,000 to Gs. 2.1 million ($120 to $370) for each affected worker and were insufficient to deter violations. Administrative and judicial procedures were subject to lengthy delays, mishandling of cases, and corruption.

In February 2014 the mandatory national minimum wage increased to approximately Gs. 1.8 million ($315) per month. According to a DGEEC, and Economic and Social Development Planning Secretariat study in 2014, the average per capita monthly income was approximately Gs. 1,419,183 ($250). Per the same report, the poverty income level was Gs. 488,332 ($85) per month, and the extreme poverty income level was Gs. 308,548 ($55) per month. The law provides for a standard legal workweek of 48 hours (42 hours for night work) with one and one-half day of rest. The law also mandates payment of at least one annual bonus of one month’s salary and a minimum of 12 days’ and a maximum of 30 days’ vacation per year, depending on total years of service. The law provides for paid national government holidays and requires payment for overtime. There are no prohibitions of, or exceptions for, excessive compulsory overtime.

Cannabis is a primary cash crop in northeastern Paraguay. With cultivation concentrated in the hinterlands between Pedro Juan Caballero and Capitan Bado, Paraguayan cannabis reputedly is of high quality and widely popular among Brazilian marijuana consumers. Most of the cannabis cultivated in Paraguay is consumed in Brazil, where traffickers are willing to pay a premium for high-quality marijuana. Paraguayan marijuana, in fact, is so popular in Brazil that Brazilian traffickers occasionally contract Paraguayan peasants to cultivate cannabis plots on their behalf.

Beekeeping has proved to be a suitable project for any family member, including single mothers, who are often the poorest of the poor.

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Page last modified: 30-08-2016 19:46:41 ZULU