Economy

Paraguay has a market economy and is marked by a large informal sector. The informal sector features both re-export of imported consumer goods to neighbouring countries as well as the activities of thousands of micro-enterprises and urban street vendors. A large percentage of the population derive their living from agricultural activity, often on a subsistence basis. The formal economy grew by an average of about 3% annually in 1995-97, but gross domestic product declined slightly in 1998 and 1999. On a per capita basis, real income has stagnated at 1980 levels. Most observers attribute Paraguay's poor economic performance to political uncertainty, corruption, lack of progress on structural reform, and deficient infrastructure.

There is a large subsistence sector, including sizable urban underemployment, and a large underground re-export sector. The country has vast hydroelectric resources, including the world's largest hydroelectric generation facility built and operated jointly with Brazil (Itaipú Dam), but it lacks significant mineral or petroleum resources. The government welcomes foreign investment and provides national treatment to foreign investors. The economy is dependent on exports of soybeans, cotton, grains, cattle, timber, and sugar; electricity generation, and to a decreasing degree on re-exporting to Brazil and Argentina products made elsewhere. It is, therefore, vulnerable to the vagaries of weather and to the fortunes of the Argentine and Brazilian economies.

According to Paraguayan Government statistics, Paraguay's GDP of $7.7 billion in 2000 represented a real decrease of 0.4% from 1999. However, given the importance of the informal sector, accurate economic measures are difficult to obtain. Paraguay generally maintains a small balance-of-payments surplus. In early 2000, official foreign exchange reserves were below $775 million, and foreign official debt remained about $2.2 billion. By 2006, foreign exchange reserves had risen to $1.543 billion and foreign debt had risen to $3.722 billion. In 2006, the GDP real growth rate was 4%, with per capita GDP (PPP) standing at $4,700. Inflation stood at 12.5%.

Post-Stroessner Reforms

Since 1989, the government has deregulated the economy, which had been tightly controlled by President Stroessner's authoritarian regime. The Rodriguez and Wasmosy administrations eliminated foreign exchange controls and implemented a dirty floating exchange rate system, reformed the tax structure and established tax incentives to attract investment, reduced tariff levels, launched a stock market, and began a process of financial reform. Though the short-lived Cubas administration was hampered by political conflicts, it attempted to reduce the rising government deficit by cutting spending, to fight intellectual property piracy in order to attract foreign investment, and to address a financial sector crisis that had simmered since 1995. The Gonzalez Macchi government has made some progress on state reform and privatisation, but the fiscal deficit has grown as has Paraguay's external debt.