Landlocked Paraguay has a limited economy based predominantly on agriculture (cotton and soy), livestock production, forestry, and the basic processing of materials. Agriculture accounted for 29% of GDP in 2000. Mineral resources are negligible. In recent years, the relative importance of agriculture has declined, and the value of services has risen; however, cattle raising remains a key economic activity. The large informal sector consists of the reexport of consumer goods from Asia and the United States to neighboring countries, and the many small street vendors and businesses that provide services.
Paraguay suffered for years from runaway inflation. The IMF joined the US government in 1957 in providing for stabilization loans that enabled Paraguay to establish a free exchange system and accelerate the pace of public investment. During the 1960s, inflation ranged between 2% and 3%, but the rate increased during the following decade to 28.2% in 1979. The rate was an estimated 30–40% through the 1980s, fueled by rapid expansion of the money supply. Inflation was at 7% in 1997, but rose to 14.6% (end of period) in 1998 mainly because of the impact of the Brazilian currency devaluation, which led to a devaluation of the local currency. It was Paraguay's third banking crisis since 1995. Inflation fell to single digits 1999 to 2001, averaging 7.7% annually, but in the face of many protests against the government's privatization and austerity initiatives, and a general effort to force the president's resignation, inflation is estimated to have increased to 10.5% in 2002 and is projected to reach 18.9% for 2003.
During the 1980s, construction of the Itaipú hydroelectric project (which was finished in 1982) stimulated Paraguay's economic expansion. The end of the Itaipú building boom, currency devaluations in Argentina and Brazil (and thus the relative overvaluation of the guaraní), and declining international market prices for Paraguay's agricultural products led to an economic slowdown which was exacerbated by the impact of adverse weather on the agricultural sector.
An economic reform package instituted in the early 1990s included judicial reform, a macro-economic stabilization program featuring fiscal austerity, liberalization of the exchange rate, and efforts to privatize state-owned enterprises. A banking crisis in 1995 required a government bailout and sent shock waves through the economy causing a sharp drop in commercial sales. Progress on the reforms were continuing in 1996 although at a slow pace due to stiff political opposition, and reforms were all but abandoned in 1997 and 1998. The economy grew at a rate of 2.7% between 1988 to 1998, but GDP contracted by 0.4% in 1998, with the financial crisis aggravated by El Niño crop damage. From 1998 to 2001, the economy experienced small contractions alternating with slow grow for a net positive growth of 2.4%. However, in 2002, the contraction in real GDP was estimated at 4.4% as the political situation became increasingly unstable. Unemployment rose to 16% in 1999, to 18% in 2000, and to 25% in 2001. An estimated 65% of the population was living below the poverty line in 2001. Integration into Mercosur (Southern Cone Common Market), has not brought hoped-for benefits of increased foreign investment and increased exports primarily because of the melt-down of the Argentinian economy in 2001 and 2002. In 2002 and 2003 Paraguay was included on the US government's list of major illicit drug-producing and/or drug transit countries.