Paraguay's GDP grows 4.5% while tax revenue stalls, widening fiscal gap

The paradox defining Paraguay's economy today is not the pace of its growth, but the widening gap between that dynamism and the state's ability to finance itself off the back of it. The Ministry of Economy and Finance acknowledged this week that, despite GDP expansion of 4.5% and an acceleration of economic activity to 5.6% year-on-year through May driven by agriculture and services, fiscal revenues are barely inching forward. It is a contradiction that, in any other emerging economy, would set off alarms in sovereign debt markets. In Paraguay, where Treasury bonds in the local market already account for roughly USD 1.2 billion outstanding and the government is looking to place new issuances, the tension between robust growth and fiscal fragility has become the defining story of the moment.

Public debt rose by USD 1.498 billion in just six months, while interest payments grew 12.9% over the same period. Former minister Rojas himself warned that the problem is structural: public spending is expanding at a pace the tax base cannot sustain, in part because the tax burden remains among the lowest in the region, hovering around 10% of GDP. The Ministry of Economy, which has already put the elimination of 30 internal directorates on the table as a signal of austerity, is targeting 2028 as the horizon for bringing the deficit back to the legal ceiling of 1.5% of GDP — a timeline some former ministers view as optimistic. President Santiago Peña went so far as to convene a roundtable of former Finance ministers to analyze the deficit and accumulated arrears, an unusual gesture that reveals just how seriously the Executive views the situation. The new minister, Óscar Lovera, took office with a pledge to review every state program within the framework of the 2027 budget, prioritizing resources for healthcare — a sector whose debt to suppliers has become the most visible symptom of the broader problem.

The debt owed to pharmaceutical companies, whose origins the ministry itself had to explain publicly, is part of a broader pattern of off-budget commitments piled up without sufficient revenue backing. The MEF announced new controls and the possibility of sanctions to prevent a recurrence, but the signal comes late for suppliers already carrying the weight of that debt. In parallel, the Dirección Nacional de Ingresos Tributarios reduced the interest rate on installment tax payments starting in September, a relief for taxpayers that also reflects the treasury's intent to recover revenue without added friction. Customs collections, however, fell 10.4% year-to-date, acting as a concrete drag on the revenue growth of the DNIT, the new entity that merged Tax and Customs administrations under the promise of raising the tax burden to 12%.

Against this pressure on public accounts, the private financial system paints a notably more solid picture. According to Banco Central del Paraguay data, credit to the private sector grew 14.4% in June and deposits expanded 19.4% — figures that reflect both the dynamism of consumption and the confidence placed in the local banking system. The IMF, while acknowledging the overall strength of the Paraguayan economy, warned of fiscal risks and projects the country will grow at nearly double the global average this year, an estimate local private agents are matching with growing optimism around 5%. Remittances, which reach USD 732 million annually, help sustain consumption and the real estate market, while the automotive sector and manufacturing are diversifying an economy historically dependent on the soy complex — which nonetheless remains decisive, generating USD 2.492 billion in exports through May.

In the labor market, second-quarter data reveal another structural tension: employment rose, but most of the jobs created were informal, with 1,753,000 people affected by that condition. Micro, small, and medium-sized enterprises employ nearly 80% of workers — a structure that explains both the resilience of private consumption and the state's difficulty in broadening its tax base. The deflation recorded in July, attributed by the BCP to the behavior of two specific categories, offers transitory relief to purchasing power, though the fourth adjustment of the year in fuel prices at private-brand stations pushes in the opposite direction. Petropar, the state-owned oil company, opted to hold its prices unchanged, creating a duality in the market that could become unsustainable if global crude continues its upward trajectory.

On the external front, Taiwan's foreign ministry signaled its efforts to increase imports of Paraguayan soy, a diplomatic gesture with real commercial implications for the country's leading export product. In parallel, Paraguay is negotiating within the EU-Mercosur framework for an equitable distribution of tariff quotas, demanding parity of conditions with its bloc partners. The World Bank approved a USD 300 million loan to foster a more resilient economy, reinforcing an international narrative that contrasts with domestic tensions.

What is worth watching in the coming weeks is how negotiations on the 2027 budget evolve, which will determine whether the MEF can discipline spending without compromising public investment in infrastructure and human capital. The pension fund reform, whose parliamentary approval was expected this week with modifications, adds another political management front. And in the debt market, the outcome of the new bond issuance the government is preparing will say a great deal about investor appetite for Paraguayan sovereign risk at a moment when the growth narrative alone no longer suffices to obscure the gradual deterioration of fiscal fundamentals.

**Catedral and Farmacenter (privately held)** — The two most significant pharmacy chains in the Paraguayan market announced their merger, a deal that will consolidate retail drug distribution in a country whose health sector is in the midst of a debt crisis with its suppliers. The transaction reshapes the competitive landscape of pharmaceutical retail in Paraguay and could draw attention from regional operators interested in the Andean-River Plate market.

**ANDE (state-owned enterprise, not publicly listed)** — The state electricity administration extended its "Ñande Ahorro" program after managing debts totaling more than USD 116 million, while the government appointed new authorities to the entity. The leadership restructuring and the weight of that unpaid portfolio are indicators of the financial state of Paraguay's public enterprises, whose consolidated debt has direct implications for the sovereign risk assessed by Fitch — which maintains the country's BB+ rating — and other international agencies.