The Critical analysis in the Economy of Paraguay

Business

  • Author Chathushka Gihan Ekanayake
  • Published March 7, 2021
  • Word count 2,129

Executive Summary

This report contains an analysis of economy of Paraguay and key factors driving the country’s economy. Economy of Paraguay is highly dependent on its agriculturally based products. As one of the results the country is suffering from wide gap wealth distribution. According to the statistics Paraguay’s the rate of employment is high and even the economic growth is rapid the poverty increases year by year. In the analysis it is discussed in details by stating examples from past records.

The government of the Paraguay decided to lower the expenditure of the government and encourage the private investments locally and internationally. In the analysis, reasons are discussed in depth.

In this analysis practical usage of economic indicators, what is the real usage of them, what they actually mean are in depth discussed. As mentioned in the analysis further, the interconnectivity of the factors is noted with examples.

Keywords: Economy, Paraguay, economic indicators

Introduction

Paraguay is a middle-income country that changed rapidly in the 1970s and 1980s as a result of hydroelectric development, agricultural colonization, construction, and cash crop exports. The country is highly dependent on agricultural products. In recent years economy of Paraguay has rapidly grown due to increase in the agricultural imports namely soybeans. When considering numbers, agriculture represents 30% of the country’s GDP.

In 1986 the country's gross domestic product (GDP) was approximately US$3.4 billion, or roughly US$1,000 per capita, holding second place among the Spanish-speaking countries of South America. But this huge weightage on the agriculture based economy and low tax collections further increased the already wide gap wealth distribution. Though the economy showed rapid growth, the extreme poverty increased up to 20% during 2001 to 2012. As a result of wealth gap in the society, Paraguay held human development index of 0.669 in year 2013.

The mentioned sky rocketing growth in the economy came to temporarily pause in year 1982, the commodity prices for cotton and soybeans came at its lowest. This sudden drop was caused by the construction at Itapúa and recession happened in worlds economy. By year 1987 the Paraguayan economy again started it rapid growth. But yet again the whole economy increasingly dependent on soybeans and cotton exports and overall economic dynamism. These two crops, however, remained subject to external price fluctuations and local weather conditions, both of which varied considerably.

Paraguayan government economic policies deviated a little by late 1980s, consistently favoring a strong private-enterprise economy with a large role for foreign investment. Unlike most Latin American economies, in Paraguay import tariffs were generally low, fiscal deficits manageable, and exchange rates not overvalued.

Although Paraguay faced significant obstacles to future economic development, it displayed extraordinary potential. Paraguay contained little oil and no precious metals or sea coasts, but the country was self-sufficient in many areas and was enriched with fertile land, dense forests, and swift rivers. The decision to open the eastern border region to economic activity and continued agricultural expansion was expected to effect rapid changes in Paraguay’s economy.

Overall look at the country

Mining and minerals

Paraguay has few mineral resources and very little history of mining success. Time to time searches are carried out searching for overlooked mineral deposits. Small extraction projects exist, but the country's iron and steel manufacturers must import raw materials from neighboring countries.

Industry and manufacturing

The industrial sector produces about 25 percent of Paraguay's gross domestic product (GDP) and employs about 31 percent of the labor force. Output grew by 2.9 percent in 2004, after five years of declining production. Even though the country is known for its agriculturally based economy, Paraguay is now showing some industrial growth in long term basis. Strong growth also is evident in the production of edible oils, garments, organic sugar, meat processing, and steel. Nevertheless, capital for further investment in the industrial sector of the economy is scarce.

Energy

Paraguay relies almost solely on hydroelectric power to meet its energy needs. The Itaipú Dam, jointly owned by Paraguay and Brazil is world's second largest power-generating capacity: Additionally, Paraguay co-owns another major hydropower plant, Yacyretá, with Argentina. Paraguay uses only a small portion of the energy it generates through Itaipú and Yacyretá. Out of Paraguay-generated more than 48 billion kilowatt-hours of energy the country itself consumed only 2.5 billion kilowatt-hours while exporting 45.9 billion kilowatt-hours. Paraguay in second place worldwide as an exporter of electrical power.

Services

The services sector made up nearly 50 percent of Paraguay's gross domestic product in 2004 and employed about 19 percent of Paraguay's working population. The importation of goods, especially from Argentina and Brazil, for sale and illegal re-exportation creates service industry jobs.

Tourism

Paraguay has a small tourism industry. Total tourism receipts declined annually from 2000 through 2002. In 2003 Paraguay's hotel occupancy rate was 38 percent. It increased by 15 percent in 2004. Small gains in tourism have come from business rather than leisure travelers. Impact tourism have on country’s economy is very low.

Labor

Paraguay's formal labor force was estimated to total about 2.7 million workers in 2004. About 45 percent worked in the agricultural sector, 31 percent in the industrial sector, and 19 percent in the services sector. Unemployment was estimated at about 15 percent.

The current state of Paraguay economy

Paraguay has achieved impressive economic growth 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 continuous growth has been accompanied by poverty reduction. In the considered period the total and extreme poverty have fallen by 49 and 65 percent, respectively. Though the poverty reduction is considerably low when comparing with other region countries but lag behind when considered the economic growth.

After a strong performance in the first half of 2018, due to suboptimal performance of the main trading partners, economic growth in Paraguay decelerated in the second half of the year. In the months of January-June expansion was over 5.4% with the average of 3.6% for the whole year.

In 2019 inflation decelerated close to boundary level of the target range. But monetary policy remained unchanged with the inflation objective. The central bank of Paraguay lowered the policy rate by 25% to 5%. Central Bank data, recently revised, indicates that Paraguay had a current account surplus of 3.1 percent of GDP in 2017, underscoring solid fundamentals.

Paraguay has the lowest public debt when considering with the regional. In 2018 public investment decrease by 11.8% while public wage bill increased by 9.5%.

In 2019 Paraguay has projected an economic growth below 4% with the impact of Argentina’s slowdown, decreased global growth prospects, the lost amount of harvest lost due to drought. Central Bank data, recently revised, indicates that Paraguay had a current account surplus of 3.1 percent of GDP in 2017, underscoring solid fundamentals.

The current account surplus is expected to gradually shrink over 2019-21 period. Due to low sovereign debt and high international reserves the country is expected to minimize the decrease of the surplus.

From early 2000s Paraguay has encountered the substantial poverty reduction and shared prosperity. For an example poverty rate in 2017 is less than the half if what was in 2013. In the country 40% of its population lives in rural areas. Rural areas have seen with impressive improvement with commercial agriculture. Most of the jobs created in urban states are for services.

The country faces an important challenge to the sustainability as most of the rural families are rely on family agriculture. Where the income is considerably low. Without improvement in current indicators of human capital, prospects for improving labor productivity growth are modest.

The new government is expected to maintain orthodox macroeconomic policies, but further attempts at reform of the inefficient public sector or greater private participation in state-run

The discussion of the Monetary and Fiscal policy

Fiscal Policy

When the county’s economy is slowing down while the people’s spending is too low, the unemployment rate is getting high and business are making not enough profits, the government is deciding to decrease the tax rates and increase the government spending. By doing government spending the government is creating jobs in highways, school buildings construction projects and pumping the money in to the economy. This is so call prime pumping. In the meantime, overall unemployment level will be fall. Companies are able to expand their business and able to make some additional profits because the tax rate is very low.

Monetary Policy

The simply the process which the monetary authority the central bank is controlling the money supply to the economy. There are two types which are Expansionary policy and Contraction policy.

Expansionary policy

This is conducted by the Central bank when there is economic recession is incurred. Then the unemployment is going to be the biggest issue and aiming to increase the aggregate demand by cutting interest rates and increase the money supply (the one way is issuing bonds and treasury bills) to the economy. Then the consumer spending is going to be increased private sectors borrowings are going to be increased because of the low interest rates, unemployment is going to be reduced and the overall economy grows.

However, as a side effect when there is more money supply would be increased the inflation, the central bank should have to control the money supply. Therefore, the central bank legislators must know to step in to the Contraction policy while there is getting higher inflation.

Contraction Policy

When there is higher inflation the central bank is deciding to lower the money supply and increase the interest rates which encourage even the public to increase savings and borrowings become expensive. This is simply a slowing down the economy.

Economist suggest to maintain the economy growth up to 3% to 4% and reducing the inflation in to one digit like 2% to 3% call the Goldilocks Economy which means not too heat and not too cold.

Conclusion and Recommendation

Paraguay has an economy which is controlled by government. The government of Paraguay controls the economy through regulation of exportation and production method, prices control, controlling production and exercising monopolistic rights on the country economy. Over one decade since the implementation of the international monetary fund (IMF) some government controls have been eased in the Paraguay economy. Government decreases the tax rates and increases the government spending. By creating jobs in highways, school buildings construction projects and pumping the money in to the economy. The introduction of national development bank in Paraguay has resulted to establishment of credit which is easily affordable to the people of Paraguay. 

As a Country, Paraguay has experienced economic shocks in recent years which have been worsened by poor economic planning. Poor governance, ineffective public investment methods, a weak tax system and poor governance are the key major factors that have led to economic shocks and low economic growth in Paraguay. In case of that Paraguay focus on adoption of comprehensive planning programs of structural and fiscal policies. Adoption of this strategy will lead to restoration of economic sustainability, improving the government spending on the economy, fighting corruption and greatly improving the Paraguay economic governance.

Adjustment policies should also be included in the in the government expenditure. Suitable adjustment on electricity and fuel prices should be made to reflect the market dollar cost so as to enhance public and government cash inflows. There should be also revision of the privatization program in order to promote a transparent program in the running of the country’s economy. The government should raise methods and policies that are efficient in improving public enterprise such an advance pricing system and better private management’s contracts so as to pave way for ultimate privatization.

Economic planning in Paraguay is done by the Technical Secretariat of Social and Economic Development, and economic plan which also gave a high priority to hydroelectric project which would bring more development in the country.

The governing economical authorities should try and reinforce the set framework of monetary policies so as to increase the central bank operational sovereignty. In foreign exchange market it is recommended that the central bank should have less intervention in its activities so as to permit elasticity of the exchange rate that assist in moderating economic shocks and control reserves for backing up monetary deposit in the banking system. It is also encouraged the economic authorities should work towards achieving appropriate macroeconomic policies which will increase economic growth in the government.

The short term future forecast For Paraguay Economy

Economic Factors of Paraguay includes interest rates, tax rates, law, policies, wages, and governmental activities. International Monetary Fund - World Economic Outlook has published the graphs for Paraguay by forecasting future performances. In 2020 GDP Growth Rate in Paraguay expected to achieve 3.998 and that is comparative higher than 2018-2019 periods. Inflation Rate in Paraguay reported at 5.541 % in Dec 2017. This records an increase from the previous number of 5.279 % for Dec 2016. Nominal Per Capita Growth Rate of 2020 in Paraguay expected to reach 6256.41. Overall, we can identify minor changes and somewhat low fluctuations will be in the short-term future.

Chathushka Ekanayake

(BBs MIT University Australia, MBA University of Kelaniya Sri Lanka)

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Article comments

Diluni Amaratunga
Diluni Amaratunga · 5 months ago
Thank you, Chathushka very useful.

Chamara Nissanka
Chamara Nissanka · 9 months ago
very useful article for my school assignment of economics TX