How will Coronavirus impact Paraguay’s economic growth in 2020?
President Abdo: The initial projection was for 4% economic growth in 2020, driven by the rebound of our agricultural and livestock sectors as the farming sector recovered from the drought in 2019. But now, the outbreak of the Covid-19 pandemic, which has hit the world economy, has impacted Paraguay’s growth figures for 2020. The hit to production related to the health emergency and the consequent lockdown measures will be far more serious than the losses we saw after the global financial crisis of 2008 to 2009.
The IMF’s latest global economic outlook predicts a global recession with a 4.5% contraction. For Latin America and the Caribbean, the situation is even worse with an estimated fall of 9.4%. In the case of Paraguay, the IMF is more positive and believes the economy will only shrink by 1%. That reflects Paraguay’s fundamental macroeconomic strengths and the positive impact of our coronavirus package of fiscal and monetary economic measures worth 9% of our GDP.
The fiscal component amounts to 4.6% of GDP. It’s comprised of a health spending boost worth 1.2% of GDP, direct transfers to formal and informal workers impacted by lockdown of 1.8% of GDP and extra capital to the guarantee and credit fund for SMEs. It also includes additional funding for social security and public services, worth 1.6% of GDP, as citizen payment has been deferred.
In monetary terms the Paraguayan Central Bank has significantly reduced interest rates. Moreover, it has added liquidity amounting to 4.5% of GDP, through financial measures, such as the reduction of required reserves. It’s the largest monetary package in Paraguay’s history and we are confident that these measures will mitigate the negative economic impact of the lockdown and lay the foundations for a solid economic recovery in the second half of 2020 and in 2021.
Paraguay is 125th in the World Bank Ease of Doing Business Rankings; how will your government improve the business environment?
PA: The government has been working on a package of structural reforms that aim to improve the business environment, our economic competitiveness and strengthen institutions. It’s not enough to increase public investment, we need to improve the efficiency and quality of the spending. We are conscious that reforms of health, education and social security are urgent to empower the human capital and ensure sustainable growth over the medium term.
Despite the fact that 2019 was a bad year for the economy, we managed to advance in our reform agenda. We have passed an important package of anti-money laundering legislation, while we also updated our tax system. The changes to the tax system will make the system fairer and also improve the business environment because it reduces the effective tax rate on profits and simplifies the tax code, which should encourage micro businesses to enter the formal economy.
To the same end, we created a new legal structure – Company of Simple Shares – which is a great tool for investors in Paraguay. We are now refining that regulation and working on a unified platform for opening and closing companies that should make it easier to start a new business in Paraguay. We have more legislation sitting in Congress that will also work to reduce bureaucracy for business and make it easier for SMEs to access credit. We have a particular focus on SMEs because they employ 76% of the Paraguayan workforce.
What are Paraguay’s competitive advantages to attract investment?
PA: In recent years Paraguay has improved the environment for international investors, maintaining a healthy rhythm of economic growth, with low and stable inflation and sustainable fiscal accounts.
One of the main advantages is our low tax take for businesses. Then you have the special tax regimes for attracting investment, for example we have favourable taxes for free zones and public-private-partnerships. Finally, you have our people, which offer both a young workforce and a growing middle class.
Paraguay has positive demographics; how is your government taking advantage of the opportunity?
PA: Equipping the human talent of our young population and preparing them for the challenges of the future of work is one of the objectives of our government. It’s estimated that our demographic window will continue until 2054, which gives us time to enact real change.
Paraguay’s strategy is to build quality health and education systems, with the main emphasis are focused on the initial stages of life. At present we are working on a reform of both systems. In the short-term they have both been impacted by the Covid-19 pandemic and we are creating a fund to help them survive the crisis. Moreover, education and training will be key for us to be competitive in the global economy, allowing us to boost productivity and create a higher standard of living. In the coming years we will see significant increases in demand for health and education, which is why we are working now to ensure new professionals have the skills and preparation necessary to be the teachers, doctors and nurses of the future.
“It’s estimated that our demographic window will continue until 2054, which gives us time to enact real change…”
We realise that this demographic window will only be positive if our abundance of young people is translated into an increase in productivity that results in greater earnings and higher savings that can be used for investments.
There is limited trade and investment between Paraguay and the UK; how do you plan to improve the business relationship?
PA: Since the reopening of UK Embassy in Paraguay in 2013, bilateral relations have been strengthened. We know that the UK sees us as a commercial ally, with a stable economy and key sectors like agribusiness, energy, trade and services. On our side, we have identified more than 60 items that Paraguay could export successfully to the UK. They are mainly from the agribusiness sector, such as soy, maize, meat, leather, vegetable oils, organic sugar, stevia and rice. On the other side of the trade, we buy heavy machinery, alcoholic drinks, vehicles, fuels and chemicals from the UK, which shows that our economies are complimentary.
In 2019 trade between the two countries was worth $157 million and we are convinced that we can strengthen this. We also want to continue our good work in education cooperation, through programmes like Chevening and Becal, so that Paraguayan citizens can study post-graduate degrees in the UK. Paraguay and the UK maintain strong historic links in diplomatic, economic, commercial and investment areas. We are sure that our country can find more opportunities in the UK, especially given that we are strategic partners.
Your period as president ends in 2023; what will your legacy be?
PA: I hope that when the presidential period finishes, we will have strengthened the Republic’s institutions, having built upon the macroeconomic bases that we will have preserved. We will leave the important legacy of a health system and public education that offers a quality service to all Paraguayans without exception and we will have a state that is more efficient and a tax system that is fairer.