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 percent 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 percent 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 percent in the first half of 2019, it retracted to 12.9 percent in the second half of the year. With a weaker economy and inflation close to the lower band of the target range (4 +/- 2 percent), 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 percent. In February 2020, the inflation rate was 2.4 percent 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 percent 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.
