Abstract
Selected Issues
What Caused the Growth Acceleration?
A. Introduction
1. Paraguay has experienced a growth acceleration over the past decade. GDP per capita grew at an average annualized rate of 3 percent, compared to 0.8 percent for the LAC region. In PPP-terms, growth was even more rapid.
2. This paper investigates the reasons for the growth pickup in Paraguay and explores the potential for sustainable future growth. It shows that the growth acceleration over the past 15 years is the combined result of a few factors: 1) a bounce back from the crisis in the late 1990s and the sub-par growth of the two decades prior; 2) a benevolent external environment, the commodity price boom in particular; 3) the improved macroeconomic stability. And in terms of its composition, growth in the past has largely been extensive, mostly coming from capital deepening and increasing labor inputs, rather than productivity increase, though TFP growth has played a bigger role in the most recent years.
3. Going forward, the benign external environment that has facilitated growth may no longer be present. Sustainable growth needs to rely on higher productivity increase and faster development of the emerging non-agricultural, non-energy tradable sector.
B. Why Has Growth Picked up in Paraguay?
4. Over the past half century, the Paraguayan economy has gone through significant swings. The country experienced an economic boom during the 1970s, as the construction of the Itaipu dam and improved connectivity with Brazil stimulated the economy, and the price surge in soybean and cotton aided the agricultural sector.
5. Growth slowed down significantly during the 80s and 90s, after the completion of the Itaipu project. Declining agricultural prices during the period also dampened the income from commodity exports, which constituted around 70 percent of total exports. Growth performance was also affected by the economic slowdown in the neighboring region over the period, as the trade/investment tie between Paraguay and other countries in the region, especially Brazil and Argentina, was historically very strong.
6. Since 2003, growth has seen a major comeback, averaging over 4 percent annually. Remarkably, Paraguay has maintained its steady growth despite lackluster economic performances in Brazil and Argentina since 2010.
Real GDP Growth: Paraguay vs LAC
(In percent)
Citation: IMF Staff Country Reports 2019, 112; 10.5089/9781498312318.002.A001
Sources: Penn World Tables, WEO and IMF staff calculations.Real GDP Growth: Paraguay vs LAC
(In percent)
Citation: IMF Staff Country Reports 2019, 112; 10.5089/9781498312318.002.A001
Sources: Penn World Tables, WEO and IMF staff calculations.Real GDP Growth: Paraguay vs LAC
(In percent)
Citation: IMF Staff Country Reports 2019, 112; 10.5089/9781498312318.002.A001
Sources: Penn World Tables, WEO and IMF staff calculations.
GDP per Capita
(In percent of US level)
Citation: IMF Staff Country Reports 2019, 112; 10.5089/9781498312318.002.A001
Sources: WEO, BCP and IMF staff calculations.GDP per Capita
(In percent of US level)
Citation: IMF Staff Country Reports 2019, 112; 10.5089/9781498312318.002.A001
Sources: WEO, BCP and IMF staff calculations.GDP per Capita
(In percent of US level)
Citation: IMF Staff Country Reports 2019, 112; 10.5089/9781498312318.002.A001
Sources: WEO, BCP and IMF staff calculations.7. The pickup in growth is also reflected in the fact that Paraguay has experienced real convergence with advanced economies in recent years. GDP per capita has been catching up to the US level by 0.4 percentage point annually since 2011, reverting the trend of divergence over the two decades prior. Convergence in PPP terms was even greater during the 2000s, reflecting the purchasing power gain due to exchange rate appreciation associated with the agricultural commodity price boom.
Exchange Rate and Soybean Price
Citation: IMF Staff Country Reports 2019, 112; 10.5089/9781498312318.002.A001
Sources: BCP and IMF staff calculations.Exchange Rate and Soybean Price
Citation: IMF Staff Country Reports 2019, 112; 10.5089/9781498312318.002.A001
Sources: BCP and IMF staff calculations.Exchange Rate and Soybean Price
Citation: IMF Staff Country Reports 2019, 112; 10.5089/9781498312318.002.A001
Sources: BCP and IMF staff calculations.8. The growth acceleration in the past decade and a half is the combined result of both internal and external factors, including positive commodity price shock, improved macroeconomic stability, and increased economic openness and diversification.
Improved Macro Stability Facilitated Growth
9. Paraguay experienced a severe banking crisis during the second half of the 1990s. The crisis was the result of rapid financial liberalization, combined with lax entry requirements for financial institutions and weak banking sector supervision.
10. The crisis cost over 12 percent of GDP in various rescue packages. Following the crisis, the nominal and real exchange rate plummeted, and the dollarization in the financial system increased. The fiscal deficit rose, as well as government debt. The loan delinquency ratio in the banking sector increased to over 20 percent. And real GDP per capita dropped by over 10 percent from 1995 to 2000.
11. The economy started growing again in the early 2000s. Macroeconomic stability was restored in the context of several IMF-supported programs. During and after the crisis, the BCP implemented restrictive monetary policy, including the use of open market operations to absorb the liquidity injection into the financial system. The fiscal stance was also kept conservative. As a result, inflation came down. Inflation has averaged 6 percent since 2000, compared to 17.4 percent for the two decades before.
12. SThe BCP adopted an inflation targeting framework in 2011, which helped to further reduce inflation and price volatility. At the same time, exchange rate volatility1 has also come down. The increased price stability had an enabling effect on trade, investment, and credit growth.
Inflation
(In percent)
Citation: IMF Staff Country Reports 2019, 112; 10.5089/9781498312318.002.A001
Source: BCP and IMF staff estimates.Inflation
(In percent)
Citation: IMF Staff Country Reports 2019, 112; 10.5089/9781498312318.002.A001
Source: BCP and IMF staff estimates.Inflation
(In percent)
Citation: IMF Staff Country Reports 2019, 112; 10.5089/9781498312318.002.A001
Source: BCP and IMF staff estimates.
Exchange Rate Volatility
(In units)
Citation: IMF Staff Country Reports 2019, 112; 10.5089/9781498312318.002.A001
Source: BCP and IMF staff estimates.Exchange Rate Volatility
(In units)
Citation: IMF Staff Country Reports 2019, 112; 10.5089/9781498312318.002.A001
Source: BCP and IMF staff estimates.Exchange Rate Volatility
(In units)
Citation: IMF Staff Country Reports 2019, 112; 10.5089/9781498312318.002.A001
Source: BCP and IMF staff estimates.13. The public finances were put in order. Fiscal deficits, which had amounted to 8 percent in the early 1990s turned into fiscal surpluses. Government debt was reduced from over 65 percent of GDP in 1990 to around 20 percent in 2017. The fiscal responsibility law, put in effect in 2015, prescribed definitive rules for government spending and deficit, further safeguarding fiscal sustainability.
Fiscal Performance
(In percent of GDP)
Citation: IMF Staff Country Reports 2019, 112; 10.5089/9781498312318.002.A001
Sources: BCP and IMF staff estimates.Fiscal Performance
(In percent of GDP)
Citation: IMF Staff Country Reports 2019, 112; 10.5089/9781498312318.002.A001
Sources: BCP and IMF staff estimates.Fiscal Performance
(In percent of GDP)
Citation: IMF Staff Country Reports 2019, 112; 10.5089/9781498312318.002.A001
Sources: BCP and IMF staff estimates.
Government Debt vs GDP Growth
Citation: IMF Staff Country Reports 2019, 112; 10.5089/9781498312318.002.A001
Source: BCP and IMF staff estimates.Government Debt vs GDP Growth
Citation: IMF Staff Country Reports 2019, 112; 10.5089/9781498312318.002.A001
Source: BCP and IMF staff estimates.Government Debt vs GDP Growth
Citation: IMF Staff Country Reports 2019, 112; 10.5089/9781498312318.002.A001
Source: BCP and IMF staff estimates.14. The health of the banking sector was restored. The NPL ratio came down from over 20 percent in 2003 to 2 percent in 2008, as problematic banks were forced to either close or significantly scale down, and the remaining banks took a more conservative approach in lending. Banking sector supervision was reformed in the aftermath of the banking crisis in the late 1990s, including a move towards risk-based supervision, strengthened prudential standards, and a more comprehensive legal framework. As a result, the financial soundness of the sector has greatly improved. The financial sector reforms were aided by the two IMF-supported programs from 2004 to 2007, which facilitated the implementation of new Source: BCP and IMF staff estimates banking legislation and prudential regulations.
Financial Deepening
Citation: IMF Staff Country Reports 2019, 112; 10.5089/9781498312318.002.A001
Financial Deepening
Citation: IMF Staff Country Reports 2019, 112; 10.5089/9781498312318.002.A001
Financial Deepening
Citation: IMF Staff Country Reports 2019, 112; 10.5089/9781498312318.002.A001
15. The improved macroeconomic management has helped Paraguay avoid the boom-bust cycle that has plagued some of its neighbors in recent years. And as a result, the economic performance of the country is increasingly decoupled from the rest of the region.
Loan Delinquency Ratio
(In percent)
Citation: IMF Staff Country Reports 2019, 112; 10.5089/9781498312318.002.A001
Sources: BCP and IMF staff calculations.Loan Delinquency Ratio
(In percent)
Citation: IMF Staff Country Reports 2019, 112; 10.5089/9781498312318.002.A001
Sources: BCP and IMF staff calculations.Loan Delinquency Ratio
(In percent)
Citation: IMF Staff Country Reports 2019, 112; 10.5089/9781498312318.002.A001
Sources: BCP and IMF staff calculations.
Loan to Deposit Ratio
(In percent)
Citation: IMF Staff Country Reports 2019, 112; 10.5089/9781498312318.002.A001
Sources: BCP and IMF staff calculations.Loan to Deposit Ratio
(In percent)
Citation: IMF Staff Country Reports 2019, 112; 10.5089/9781498312318.002.A001
Sources: BCP and IMF staff calculations.Loan to Deposit Ratio
(In percent)
Citation: IMF Staff Country Reports 2019, 112; 10.5089/9781498312318.002.A001
Sources: BCP and IMF staff calculations.
Paraguay and Neighbors: Fiscal Deficit
(In percent of GDP)
Citation: IMF Staff Country Reports 2019, 112; 10.5089/9781498312318.002.A001
Source: BCP and IMF staff estimates.Paraguay and Neighbors: Fiscal Deficit
(In percent of GDP)
Citation: IMF Staff Country Reports 2019, 112; 10.5089/9781498312318.002.A001
Source: BCP and IMF staff estimates.Paraguay and Neighbors: Fiscal Deficit
(In percent of GDP)
Citation: IMF Staff Country Reports 2019, 112; 10.5089/9781498312318.002.A001
Source: BCP and IMF staff estimates.
Paraguay and Neighbors: Public Debt
(In percent of GDP)
Citation: IMF Staff Country Reports 2019, 112; 10.5089/9781498312318.002.A001
Source: BCP and IMF staff estimates.Paraguay and Neighbors: Public Debt
(In percent of GDP)
Citation: IMF Staff Country Reports 2019, 112; 10.5089/9781498312318.002.A001
Source: BCP and IMF staff estimates.Paraguay and Neighbors: Public Debt
(In percent of GDP)
Citation: IMF Staff Country Reports 2019, 112; 10.5089/9781498312318.002.A001
Source: BCP and IMF staff estimates.The Agricultural Commodity Price Boom
16. The agriculture commodity price boom since the early 2000s has been a boon to growth. As the fourth largest exporter of soybeans in the world, growth in Paraguay has historically been closely correlated with soybean price fluctuations. The soybean export price in dollars tripled between 2003 and 2013, largely driven by the increasing demand from China, which imports over 60 percent of soybeans in the world. The increase in soybean price translated into a sharp increase in dollar exports. Soybean export values grew from $363 million in 2000 to $2.7 billion in 2013.
17. The price boom triggered a major increase in investment and production expansion in the agricultural sector. Sowing areas for major crops doubled Between 2003 and 2018.
18. The agricultural commodity price boom also had positive spillovers into the non-tradable sector. As the exchange rate appreciated, wages and purchasing power in dollar terms grew, which translated into increasing domestic demand for the tertiary sector. The employment and output shares of construction, commerce and other services all increased (see section IV). The commodity price boom is also a major contributing factor to the rapid growth in credit to the private sector, which increased from 13 percent of GDP in 2003 to 40 percent in 2017, with credits to agriculture and services sectors being the main growth components.
Global Soybean Import
(Index, 2000=100)
Citation: IMF Staff Country Reports 2019, 112; 10.5089/9781498312318.002.A001
Sources: WEO and IMF staff calculations.Global Soybean Import
(Index, 2000=100)
Citation: IMF Staff Country Reports 2019, 112; 10.5089/9781498312318.002.A001
Sources: WEO and IMF staff calculations.Global Soybean Import
(Index, 2000=100)
Citation: IMF Staff Country Reports 2019, 112; 10.5089/9781498312318.002.A001
Sources: WEO and IMF staff calculations.
GDP Growth vs Soybean Price
Citation: IMF Staff Country Reports 2019, 112; 10.5089/9781498312318.002.A001
Sources: BCP and IMF staff calculations.GDP Growth vs Soybean Price
Citation: IMF Staff Country Reports 2019, 112; 10.5089/9781498312318.002.A001
Sources: BCP and IMF staff calculations.GDP Growth vs Soybean Price
Citation: IMF Staff Country Reports 2019, 112; 10.5089/9781498312318.002.A001
Sources: BCP and IMF staff calculations.C. How Sustainable is the Current Growth Path?
The recent growth resurgence started from a low base
19. While Paraguay has grown rapidly over the past decade and a half, in a sense, the recent relatively high growth is a period of “normalization” from the sub-par economic performance of the period prior. Seen over a longer time period, growth has been less impressive. Real GDP per capita growth since 1995 has been modest. And GDP per capita as percentage of the US level, without PPP adjustment, is at par with that of the late 1970s.
Convergence in Latin America and Europe
(1995-2018)
Citation: IMF Staff Country Reports 2019, 112; 10.5089/9781498312318.002.A001
Source: WEO and IMF staff calculations.Convergence in Latin America and Europe
(1995-2018)
Citation: IMF Staff Country Reports 2019, 112; 10.5089/9781498312318.002.A001
Source: WEO and IMF staff calculations.Convergence in Latin America and Europe
(1995-2018)
Citation: IMF Staff Country Reports 2019, 112; 10.5089/9781498312318.002.A001
Source: WEO and IMF staff calculations.Growth Has Been Accompanied by only Moderate TFP Increases
20. A growth accounting exercise breaks down Paraguay’s GDP growth into contributions from capital, labor, and total factor productivity (TFP)2. The result indicates that in the past, growth has been predominantly driven by capital deepening and labor input growth. Throughout the 1980s and 1990s, TFP growth was mostly negative, though there has been a reversal of this trend in the last decade or so, with TFP’s contribution to growth outstripping those of capital and labor. Yet despite the more rapid increase in TFP in the recent period, long-term TFP level over the past half century has been largely flat.
Contribution to GDP Growth
(In percentage points)
Citation: IMF Staff Country Reports 2019, 112; 10.5089/9781498312318.002.A001
Sources: BCP and IMF staff calculations.Contribution to GDP Growth
(In percentage points)
Citation: IMF Staff Country Reports 2019, 112; 10.5089/9781498312318.002.A001
Sources: BCP and IMF staff calculations.Contribution to GDP Growth
(In percentage points)
Citation: IMF Staff Country Reports 2019, 112; 10.5089/9781498312318.002.A001
Sources: BCP and IMF staff calculations.
Labor Productivity, Capital Intensity and TFP
(Index, 1970 = 100)
Citation: IMF Staff Country Reports 2019, 112; 10.5089/9781498312318.002.A001
Sources: BCP and IMF staff calculations.Labor Productivity, Capital Intensity and TFP
(Index, 1970 = 100)
Citation: IMF Staff Country Reports 2019, 112; 10.5089/9781498312318.002.A001
Sources: BCP and IMF staff calculations.Labor Productivity, Capital Intensity and TFP
(Index, 1970 = 100)
Citation: IMF Staff Country Reports 2019, 112; 10.5089/9781498312318.002.A001
Sources: BCP and IMF staff calculations.21. Output growth in the agricultural sector shows a similar pattern. Labor productivity growth in the sector has been mostly driven by capital deepening, and output growth largely fueled by expansion of agricultural land. Average yield growth for major crops, however, has been limited, partly due to agricultural production being increasingly expanded to more marginal land.
External conditions are less likely to benefit growth going forward
22. The agricultural commodity price boom during the 2000s, notably in soybean price, has largely been driven by the growing demand from China. As the growth spree of China moderates, its demand increase is tapering off, as can be seen from the data for the past five years. Over the medium term, the growth benefit from external terms of trade is likely to be limited.
Soybean Yield
(Index, US year 2000 = 100)
Citation: IMF Staff Country Reports 2019, 112; 10.5089/9781498312318.002.A001
Sources: BCP, WEO and IMF staff calculations.Soybean Yield
(Index, US year 2000 = 100)
Citation: IMF Staff Country Reports 2019, 112; 10.5089/9781498312318.002.A001
Sources: BCP, WEO and IMF staff calculations.Soybean Yield
(Index, US year 2000 = 100)
Citation: IMF Staff Country Reports 2019, 112; 10.5089/9781498312318.002.A001
Sources: BCP, WEO and IMF staff calculations.
Land Usage
(In percent of total land)
Citation: IMF Staff Country Reports 2019, 112; 10.5089/9781498312318.002.A001
Sources: WEO and IMF staff calculations.Land Usage
(In percent of total land)
Citation: IMF Staff Country Reports 2019, 112; 10.5089/9781498312318.002.A001
Sources: WEO and IMF staff calculations.Land Usage
(In percent of total land)
Citation: IMF Staff Country Reports 2019, 112; 10.5089/9781498312318.002.A001
Sources: WEO and IMF staff calculations.23. Moreover, despite going through large cyclical swings, agricultural commodity price displays a general trend decline, as the long-term data indicates. Although the industrial structure of Paraguay has been increasingly diversified over the years, GDP growth is still largely coupled with agricultural prices. The decline in the latter not only affects the agriculture sector, but will be felt in the rest of the economy as well. In particular, exchange depreciation associated with a commodity price drop will negatively impact the growth of the non-tradable sector through its effect on purchasing power.
China’s Real GDP Growth
(In percent)
Citation: IMF Staff Country Reports 2019, 112; 10.5089/9781498312318.002.A001
Sources: WEO and IMF staff calculations.China’s Real GDP Growth
(In percent)
Citation: IMF Staff Country Reports 2019, 112; 10.5089/9781498312318.002.A001
Sources: WEO and IMF staff calculations.China’s Real GDP Growth
(In percent)
Citation: IMF Staff Country Reports 2019, 112; 10.5089/9781498312318.002.A001
Sources: WEO and IMF staff calculations.24. Meanwhile, growth prospects in the main trading and investment partners of Paraguay (e.g. Brazil, Argentina) are lower than in the decade before. And continued interest rate normalization in advanced economies is driving up the cost of capital and making investments more expensive. These external factors are potential detractors on growth. Though the impact of trade partners is likely to be less than in the past, given the increased decoupling of the Paraguayan economy from the rest of the region.
China’s Soybean Imports
Citation: IMF Staff Country Reports 2019, 112; 10.5089/9781498312318.002.A001
Sources: WEO and IMF staff calculations.China’s Soybean Imports
Citation: IMF Staff Country Reports 2019, 112; 10.5089/9781498312318.002.A001
Sources: WEO and IMF staff calculations.China’s Soybean Imports
Citation: IMF Staff Country Reports 2019, 112; 10.5089/9781498312318.002.A001
Sources: WEO and IMF staff calculations.
Long Run Soybean and Cotton Prices
(In 1982 USD)
Citation: IMF Staff Country Reports 2019, 112; 10.5089/9781498312318.002.A001
Sources: WEO and IMF staff calculations.Long Run Soybean and Cotton Prices
(In 1982 USD)
Citation: IMF Staff Country Reports 2019, 112; 10.5089/9781498312318.002.A001
Sources: WEO and IMF staff calculations.Long Run Soybean and Cotton Prices
(In 1982 USD)
Citation: IMF Staff Country Reports 2019, 112; 10.5089/9781498312318.002.A001
Sources: WEO and IMF staff calculations.D. Conclusion
25. Despite strong growth in recent years, like most of the Latin America, seen over a longer period, Paraguay has not attained significant economic convergence with advanced economies. Historically, growth has been largely driven by increasing labor and capital inputs, though the contribution from TFP growth has picked up somewhat in recent years. Going forward, the conductive external environment that has facilitated growth over the past decade and half may not persist. Long-run convergence will need to come from higher labor productivity growth, which requires a combination of higher TFP growth and further capital deepening.
World Competitiveness Indicators and GDP per Capita, Europe and Western Hemisphere
Citation: IMF Staff Country Reports 2019, 112; 10.5089/9781498312318.002.A001
Source: WCI and IMF staff estimates.World Competitiveness Indicators and GDP per Capita, Europe and Western Hemisphere
Citation: IMF Staff Country Reports 2019, 112; 10.5089/9781498312318.002.A001
Source: WCI and IMF staff estimates.World Competitiveness Indicators and GDP per Capita, Europe and Western Hemisphere
Citation: IMF Staff Country Reports 2019, 112; 10.5089/9781498312318.002.A001
Source: WCI and IMF staff estimates.26. Empirical data shows a strong linkage between the GDP per capita of a country and its score in a composite structural indicator such as the World Competitiveness Index, which Paraguay ranked poorly on. Identifying and correcting Paraguay’s structural deficiencies that may be hampering productivity growth and capital accumulation will be crucial for sustainable growth.
References
Garcia-Herrero, Alicia, 1997, “Banking Crises in Latin America in the 1990s: Lessons from Argentina, Paraguay, and Venezuela,” IMF Working Papers, 97140.
International Monetary Fund, 2000-2017, Paraguay: Staff Reports for the Article IV Consultation.
Santos, Alejandro, ed, 2009, Paraguay: Addressing the Stagnation and Instability Trap, Washington, DC: International Monetary Fund.
Defined as the rolling standard deviation over five-year windows.
TFP is imputed as ln(TFP)t = ln(Y)t – αln(L)t – (1 – α)ln(K)t, where Y, L, and K are real GDP, employed population, and capital stock respectively α is the share of labor compensation in GDP. Capital stock is calculated as Kt = (1 – δ)/Kt-1 + It, where It is the real investment in year t. Both α and δ are taken from the Penn World Table.
