The COVID-19 outbreak hits the Paraguay economy in a moment of economic recovery after growth had stalled in 2019. The economy was in a recession in the first half of 2019 (-3% year-on-year) due to weak performance of the main trading partners, especially Argentina, and adverse climatic conditions, but started to recover in the second half of the year (+3% year-on-year) as agriculture output rebounded along with favorable weather. Similarly, in the labor market, after the combined unemployment and underemployment rate reached 14.5% in the first half of 2019, it retracted to 12.9% in the second half of the year. With a weaker economy and inflation close to the lower band of the target range (4 +/- 2%), the Central Bank of Paraguay (BCP) moved to a more accommodative stance, consistent with the inflation objective. During 2019, the BCP lowered the policy rate by a cumulative 125 bps to 4%. In February 2020, the inflation rate was 2.4% year-on-year. The flexible exchange rate regime continued to cushion external shocks.

Paraguay has a solid macroeconomic framework based on fiscal rules, inflation targeting, and a flexible exchange rate regime. With the track-record of prudent macroeconomic policy over the last decade, low public debt and adequate FX reserves, the macroeconomic policies and crisis response measures are expected to be effective in absorbing a part of the COVID-19 shock. However, Paraguay is vulnerable to the domestic economic slowdown resulting from measures to contain the COVID-19 outbreak and its effects (social distancing, fiscal responses), as well as a steep reduction in economic activity in the global economy, and in neighboring countries. This will compound other, “pre-existing” economic risks and could disproportionally affect labor incomes of the 65% of informal workers in commerce and services. While the banking sector of Paraguay has a minimal exposure to Argentina, the real sector linkages through exports and remittances are stronger. Moreover, the concentration of exports in a few agricultural products continues to render growth and poverty vulnerable to fluctuations in agriculture commodity markets and to weather-related shocks.

Source: World Bank, Paraguay Country Overview