Paraguay Resilient Amid Regional Slowdown

Paraguay’s economy remains strong, with growth forecast at 3 percent in 2016

Regional dynamics and external risks could affect country’s economic future

Addressing structural weaknesses key to boost growth, reduce poverty

Speaking to IMF Survey, IMF Mission Chief for Paraguay, Hamid Faruqee, said that, with several countries in Latin America experiencing economic slowdowns or even contractions, Paraguay has managed to buck this trend, with one of the highest growth rates in the region. Going forward, he outlines a number of measures to help Paraguay maintain macroeconomic stability, reduce poverty, and promote inclusive growth.

IMF Survey: Paraguay is doing relatively well, compared with other countries in the region. What explains this good performance?

Faruqee: If I were to summarize, I would say that Paraguay’s economy has been resilient, especially when you consider the neighborhood it’s in. According to our estimates, regional growth is likely to be negative for a second year in a row. Brazil, which is Paraguay’s largest trading partner, is in a deep recession. So, with that as a backdrop, we see Paraguay growing solidly by about 3 percent this year, essentially the same as last year.

In terms of what explains that resiliency, I would just mention three things—generally good macroeconomic policies, sound fundamentals, and a bit of good luck.

Paraguay has been fiscally prudent for a number of years. It has very low public debt (under 25 percent GDP) and a fiscal responsibility law that came into effect last year. On the monetary side, inflation pressures have been contained and expectations are stable. The Central Bank was actually able to reduce interest rates several times last year and again at their most recent policy meeting in May. The overall stance of monetary policy remains accommodative.

Paraguay has been lucky as well. Favorable weather conditions have helped agriculture as well as electricity production. These factors have been contributors to growth and have partly offset the effects of the contraction in Brazil. Growth in these two countries has tended to move together until recently when growth differentials widened noticeably (see chart).

IMF Survey: What is the outlook for Paraguay's economy? What are the biggest risks?

Faruqee: We expect growth to remain solid—around 3 percent in 2016 and 3¼ percent in 2017—led by agriculture and construction. The soy harvest—Paraguay’s major export crop—is expected to be very good...