Rich in potential but historically low on performance, Paraguay is making a concerted effort to improve its reputation in an attempt to attract both investors and tourists to the country. Writer Silvia Pavoni

Not much is known about Paraguay. Landlocked between Brazil, Argentina and Bolivia, Paraguay emerged from the 35 years of General Alfredo Stroessner's dictatorship only in 1989. The election of current president, former bishop Fernando Lugo, ended 61 years of conservative rule in the country and was won on a campaign that focused on social values. Since his election, Mr Lugo has raised Paraguay's international profile, though often in an unfortunate manner. First he admitted to a high-profile paternity case, and then he was diagnosed with a treatable form of cancer.

Beyond the personal interest and the intrigue that politics inevitably provides, there is much more to discover. Despite facing myriad challenges, Paraguay's economy had been growing at almost 7% until the world's financial troubles hit in 2008. However, the country's gross domestic product is expected to return to pre-crisis levels this year.

Paraguay's vast amounts of fertile and inexpensive land have been exploited in a very low-intensive way, and therefore hold great potential for the agriculture sector. Any environmental concerns are assuaged by the government's identification of ethanol as a key agricultural growth area. The government is also concerned with the environmental sustainability of its economy's fast expansion. As part of its 'a todo pulmon, Paraguay respira' (Paraguay breathes fully) initiative, to which both public and private sectors are contributing, a clock has been erected in one of Asunción's squares that counts the level of oxygen created by newly planted trees in the Easter region of the country.

A natural advantage

Paraguay is permeated by rivers and sits on top of the Guarani aquifer, one of the world's largest underground reservoirs of water that is suitable for human consumption. The Itaipú Dam, which Paraguay co-owns with Brazil, is the most powerful hydroelectric generator of the world and its output means that the electricity available to Paraguay wildly exceeds its current demand. The country also displays a welcoming business environment - the number of procedures required to open a business in the country is less than half that of Argentina or Brazil - and it has an extremely favourable tax regime - corporate income tax is at 10% and no personal income tax has been implemented yet. Paraguay also boasts a young population, with more than 70% of its inhabitants under the age of 34.

"I've never seen as attractive a proposition as the one this country presents," says Conor McEnroy, founder of Abbeyfield Group, a company with interests in banking, energy and real estate. "There is an opportunity here for knowledge arbitrage by bringing first-world knowledge to Paraguay."

As exciting as this sounds, Mr McEnroy, who is also the chairman of Paraguay's Sudameris Bank, insists that any company considering investing in the country would be well advised to carry out due diligence. Paraguay still suffers from high levels of poverty, and security concerns are ever present. The government is making efforts to help the poorer parts of the country, as well as reforming the judicial system, but high crime rates still hinder the nation.

"The truth is that Paraguay is an anomaly," says Carlos Mersan, a partner of law firm Estudio Mersan. "If you look at part of the justice system, its quality is not the best in the world. But in the majority of the cases, the justice administration works. In general, and I have 40 years of experience in the field of banking and investments, investors never have problems in Paraguay [that don't get settled in the courts]. We never had expropriation of banks, for example. This is not Venezuela."

cp/96/Roy, Tobias.jpg

Tobias Roy, representative of the International Monetary Fund (IMF) in Paraguay

Priorities placed

Education is another priority for Paraguay's government, as its poor quality is putting the country's economic growth at risk. "Poor educational standards are one of the biggest handicaps facing the country," says Juan Bosch, president of shipping company Compañia Maritima Paraguaya. "Finding a secretary who knows how to write well and speaks some English is very difficult."

Efforts are being made to improve educational standards. As well as various government initiatives, One Laptop Per Child, a not-for-profit organisation based in Massachusetts, has included Paraguay in its scheme.

Further, increased tax revenues have been generated by the lowering of the corporate tax rate from 30% to 10%, which brings the cost of paying tax down a level where evasion is hardly worthwhile. As a result, there has been a widening of the taxpayer base.

"During the previous government, finance minister Dionisio Borda reduced corporate income tax, which is remarkable," says Tobias Roy, the representative of the International Monetary Fund (IMF) in Paraguay. "In a country where tax collection is low and there is tax evasion, it's an important first step to put the system on an even level."

The IMF has carefully monitored Paraguay's economic stability and macroeconomic indicators are promising. "We give technical assistance to the government," says Mr Roy. "We see it as a dialogue between experts, between people concerned with maintaining the country's macroeconomic stability."

Larger tax revenues would help the country to improve its infrastructure and education systems. The current 12% tax-to-GDP ratio does not allow for a very high level of public sector investment. But there is hope that a personal income tax, approved in 2003 but still being modified by congress, will be implemented in the next few years.

This would also help formalise Paraguay's economy, as value-added tax on personal purchases would be fully deductible, creating an incentive to buy products only when there is a receipt available. It would also mean that there will be a higher visibility with regards to money flows.

"[The issues] around income tax are political, not rational," says Carlos Walde, economic adviser to Paraguay's previous government and owner of Chacomer, a leading motorcycle company. "[This is because the] private sector worries that the public sector won't be able to guarantee confidentiality of information on their income and assets. But the formalisation of the economy means that the banking sector will be in a better position to control money flows, which can prevent money being directed towards terrorist and illegitimate activities."

Such efforts should help lift Paraguay from the bottom of the international corruption indices, where it currently stands. The aim is to attract not only foreign investors, but also talented workers that left Paraguay for better career prospects abroad. "We aim at being credible, we want people to know that we [honour] our [commercial commitments]," says Francisco Jose Rivas Almada, Paraguay's minister of commerce and industry. "We want to bring talent back to Paraguay. We want [investors] and the experience they gained in developed countries; we want them to come and to use it in Paraguay."

Paraguay is facing up to its problems, something investors would do well to bear in mind when considering the country as a potential location for their business. As Mr McEnroy points out: "Paraguay is very much open to foreign investors if they are well intentioned. Bring your first-world knowledge, but with humility."


All fields are mandatory

The Banker is a service from the Financial Times. The Financial Times Ltd takes your privacy seriously.

Choose how you want us to contact you.

Invites and Offers from The Banker

Receive exclusive personalised event invitations, carefully curated offers and promotions from The Banker

For more information about how we use your data, please refer to our privacy and cookie policies.

Terms and conditions

Top 1000 2023

Request a demonstration to The Banker Database

Join our community

The Banker on Twitter