Economy of Paraguay

The Paraguayan economy is a market system heavily reliant on agricultural products. Recent years have seen growth fueled by increased exports of agricultural goods, particularly soybeans. Paraguay benefits from a young population and vast hydroelectric power generation capabilities. However, the lack of significant mineral resources and occasional political instability pose challenges. The government actively encourages foreign investment.

Top Sectors in Paraguay

Agriculture in Paraguay

Paraguay is a major producer of soy, ranking sixth in the world with an output of 11 million tons. Other major crops included corn (maize) at 5.3 million tons and sugarcane at 6.1 million tons, placing Paraguay at 21st globally for both. The country also produced significant quantities of cassava (3.3 million tons), rice (892 thousand tons), wheat (722 thousand tons), and oranges (223 thousand tons). Additionally, Paraguay produced yerba mate (116 thousand tons), sorghum (107 thousand tons), and a variety of other agricultural products.

Industry in Paraguay

Paraguay's industrial sector was historically linked to agricultural processing until the 1970s. The construction of hydroelectric plants and new industrial incentives then began to broaden the industrial base. Industry was composed principally of manufacturing and construction. The country had no real mining sector, but the manufacture of construction materials included limited mining activity. Manufacturing and construction in the economy in the late 1980s remained dependent on developments in other sectors, such as agriculture and energy, for their growth. Although industry was becoming more visible in Paraguay, its share of GDP actually declined in the 1970s and 1980s because of more rapid growth in agriculture.

Mining and minerals in Paraguay

In recent years, foreign companies have explored Paraguay for potential undiscovered mineral deposits. Small-scale extraction projects exist for lime, clay, and materials used in cement production. However, Paraguay's iron and steel manufacturers rely on imports of raw materials from neighbouring countries.

services in Paraguay

The services sector in Paraguay comprised nearly 50 percent of the country's gross domestic product in 2004 and employed about 19 percent of the workforce. Importing goods, particularly from Argentina and Brazil, for resale and illegal reexport creates jobs in the service industry. The sector experienced a moderate growth rate of 0.9 percent from. It declined by 7.8 percent in 2002 before recovering with a 1.6 percent growth rate in 2003. Economic instability and a large black market have hindered the development of the formal services sector in Paraguay.

Travel and tourism in Paraguay

Paraguay has a developing tourism industry. Tourist arrivals declined yearly between 2000 and 2002. In 2003, hotel occupancy rates were low at 38% but rose by 15% in 2004. Growth in tourism has primarily come from business travelers rather than leisure tourists. Paraguay was previously known for its duty-free goods, but stricter regulations by neighboring Brazil and Argentina have reduced shopping tourism.

Paraguay - Key Economic Indicators

Exports and Imports

In 2023, Paraguay's exports were valued at approximately $13 billion. The country primarily exports agricultural products, including soybeans, beef, corn, and wheat, as well as hydroelectric power from its significant dam projects like the Itaipu and Yacyretá dams. Imports totaled around $11 billion, consisting mainly of machinery, vehicles, fuels, and chemicals. This resulted in a trade surplus of about $2 billion, indicating a healthy export sector that contributes positively to the economy.

Infrastructure

Paraguay has been investing in infrastructure to boost economic growth and connectivity. The country has about 78,000 kilometers of roads, with approximately 10,000 kilometers paved. Major infrastructure projects in 2023 included road expansions and upgrades, bridge construction over key rivers, and improvements to Asunción’s Silvio Pettirossi International Airport. Total investment in infrastructure for 2023 was around $1 billion, with significant contributions from both the government and international partners.

Balance of Trade

With exports at $13 billion and imports at $11 billion, Paraguay enjoyed a trade surplus of approximately $2 billion in 2023. This surplus is driven largely by the country’s robust agricultural exports and hydroelectric power sales. The positive trade balance supports the country's foreign exchange reserves and contributes to economic stability.

Fiscal Policy

Paraguay's government expenditure in 2023 was around $11 billion, focusing on health, education, infrastructure, and social services. The fiscal deficit was about 1.5% of GDP, which equates to roughly $500 million. Government revenue was estimated at $10.5 billion, derived from taxes, customs duties, and earnings from state-owned enterprises. Efforts to enhance tax compliance and efficiency are ongoing to ensure fiscal health and reduce the deficit.

Monetary Policy

Paraguay's central bank, Banco Central del Paraguay (BCP), is responsible for the country’s monetary policy. In 2023, the inflation rate was approximately 4%, reflecting the central bank's efforts to maintain price stability. Interest rates are adjusted to control inflation and stimulate economic growth. The local currency, the Paraguayan guaraní (PYG), is managed to ensure stability and competitiveness in international markets.

Trade Agreements

Paraguay is an active member of the Southern Common Market (MERCOSUR), which facilitates trade with neighboring countries like Argentina, Brazil, and Uruguay. Additionally, Paraguay has bilateral trade agreements with several countries, enhancing its market access and investment opportunities. These agreements help to diversify export markets and attract foreign direct investment, contributing to economic growth.

Environmental Regulations

Paraguay has implemented various environmental regulations to protect its natural resources and biodiversity. Key initiatives include forest conservation programs, sustainable agricultural practices, and measures to protect waterways and wildlife. In 2023, the government allocated around $100 million for environmental protection projects, including reforestation, soil conservation, and efforts to combat illegal deforestation and pollution.

Tax System in Paraguay

Capital Gains Tax: Paraguay does not have a specific capital gains tax. Instead, capital gains are generally treated as regular income and taxed accordingly under the individual or corporate income tax system.
Corporate Tax Rate: The corporate tax rate in Paraguay is 10%. However, companies in certain sectors, such as financial institutions and insurance companies, may be subject to additional surcharges, bringing their effective tax rate up to around 20%.
Sales Tax: Paraguay imposes a Value Added Tax (VAT) of 10% on most goods and services. Certain essential items, such as basic foodstuffs and medicines, are subject to a reduced VAT rate of 5%.
Property Tax: Property tax in Paraguay varies by municipality, but it generally ranges from 1% to 1.5% of the assessed value of the property. The tax is collected annually by local governments.
Payroll Tax: Employers in Paraguay are required to contribute to social security at a rate of 16.5% of an employee's gross salary. Employees contribute 9% of their gross salary. These contributions fund social security benefits, including pensions, health insurance, and other social services.
Tax Deductions and Credits: Paraguay offers various tax deductions and credits to reduce tax liability for both individuals and businesses. These may include deductions for dependents, medical expenses, and education costs. Businesses can benefit from deductions for investments in certain sectors, research and development, and job creation incentives.
Tax Compliance: The efficiency of tax collection in Paraguay has been improving, with the government investing in modernizing the tax administration system. The General Directorate of Taxes (SET) has implemented electronic filing and payment systems to enhance compliance and reduce evasion. In recent years, the tax compliance rate has increased, contributing to higher revenue collection.
Tax Burden: The overall tax burden in Paraguay, which represents the total amount of taxes paid by individuals and businesses relative to the economy, is moderate compared to regional standards. In 2023, the tax-to-GDP ratio was approximately 13%, reflecting the relatively low tax rates and the government's efforts to balance tax collection with economic growth.

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