Paraguay's Growth Masks a Fiscal Recklessness Election Year Timing Can't Hide

Paraguay is growing at 6.6 percent and breaking its own fiscal law. That combination — the best growth number in the region paired with a deficit more than double the legal ceiling — is the most genuinely contestable economic story in Mercosur this week, and the one that deserves the most scrutiny precisely because it is receiving the least.

Let's be precise about what the numbers say. Paraguay's Central Bank reported GDP growth of 6.6 percent in 2025, with projections of around 5 percent for 2026. Moody's has reaffirmed the investment grade. The IMF has nodded approvingly. On the surface, this looks like the region's success story. But the Ministry of Economy and Finance has simultaneously acknowledged that the fiscal deficit will hit roughly 3.2 percent of GDP this year — more than double the 1.5 percent ceiling enshrined in the country's own Fiscal Responsibility Law — and that it will not return to that ceiling until 2028, with the 2027 deficit potentially reaching 3.9 percent. Public debt grew by USD 1.498 billion in six months. Interest payments are up between 13 and 17 percent year-on-year. The government is issuing new debt to pay state suppliers. A former deputy finance minister has called this the worst fiscal management since 2003.

This is not a technicality. A fiscal rule that a government violates in good times — when growth is running at 5 to 6 percent, commodities are performing and remittances are flowing — is not a fiscal rule. It is decorative legislation. If Paraguay cannot respect a 1.5 percent deficit ceiling when the soy complex alone injects USD 3.5 billion into the economy and the World Bank is writing USD 300 million support checks, one is entitled to ask under what conditions it ever would. The answer the new Economy Minister, Óscar Lovera, offers is 2028 — conveniently after the next electoral cycle. Former minister Dionisio Borda has said plainly that this timeline is too distant and that current spending must be contained now. He is right, and no amount of GDP growth changes that arithmetic.

The structural problems underneath the headline number deserve equally direct treatment. Customs revenue fell 10.4 percent despite a strong guaraní that should have boosted imports and tariff intake — a contradiction that suggests either underreporting, informality, or smuggling filling the gap. The informal economy accounts for somewhere between 35 and 47 percent of GDP depending on the methodology. Pig contraband from Brazil is driving local pork prices below production costs. Cucumber growers are being undercut by smuggled product. The Social Security Institute concentrates more than 70 percent of its certificate of deposit holdings in a handful of banks. The Ministry of Health has accumulated debts to suppliers that the Economy Minister himself had to explain publicly. The MOPC infrastructure agency is reportedly awarding contracts at prices up to 81 percent above reference levels. None of these are peripheral details. They are the connective tissue of a state that is spending faster than it should while collecting less than it must.

To be fair to Asunción, the Peña government has launched institutional reforms with genuine ambition. The merger of the Tax Undersecretariat and Customs into the DNIT is structurally sound and long overdue. The proposed Ministry of Mines and Energy would bring regulatory clarity to a sector that has operated in opacity since the Itaipú and Yacyretá treaties were signed. The proposed pension reform for public employees addresses a latent actuarial threat. A target of raising tax collection from 10 to 12 percent of GDP — adding roughly USD 400 million annually — is the right direction. These are not cosmetic measures, and credit belongs where it is due.

But institutional architecture does not substitute for fiscal discipline, and the timing of these reforms is inseparable from the political calendar. Paraguay holds general elections in 2028. The government has chosen to let the deficit run wide through 2027 and promise adjustment in the election year itself — a sequencing that any honest market-liberal should recognize as the oldest fiscal illusion in the Latin American playbook. The Itaipú treaty renegotiation, which could cost Paraguay hundreds of millions of dollars annually starting in 2027 when Annex C expires and the energy-cession revenues to Brazil change, adds a specific and underappreciated fiscal risk that the current trajectory does nothing to cushion against.

Paraguay has earned its investment grade through years of comparatively disciplined management. It would be an expensive mistake to treat that rating as a permanent entitlement rather than a contingent verdict. Markets that are currently applauding 6.6 percent growth have a way of repricing quickly when the fiscal deterioration becomes impossible to explain away. The government still has time to make the adjustment credible — but the window is narrowing, and the electoral clock is already running.