Paraguay's fiscal deficit surges to 3.2%, forcing government to extend consolidation timeline to 2028.

The Ministry of Economy and Finance (MEF) is not weathering an ordinary fiscal crisis: it is managing an accumulation of inherited liabilities that today materializes in concrete figures and forces President Santiago Peña's government to redefine its consolidation strategy with less room to maneuver than its own officials anticipated barely a year ago.

The trigger for today's session is the official acknowledgment that the fiscal deficit will close near 3.2% of GDP this year, deviating from the 1.5% target that the Fiscal Responsibility Law establishes as its convergence ceiling. According to ABC Color, the MEF recognized that accumulated debts to suppliers — particularly those of the Ministry of Public Health — are the main factor behind this jump. The minister explained in detail how that health-sector debt was generated: spending commitments executed in prior fiscal years that were neither booked nor paid on time, and which now surface as enforceable liabilities. The government plans to issue new debt to settle those obligations, insisting that total public debt will remain below 40% of GDP, though the stock has already grown by US$1.498 billion in just six months, with interest service rising between 12.9% and 16.8% depending on the measurement window. Outstanding external loans total US$5.623 billion, with half of those resources still pending disbursement.

President Peña responded to the pressure by convening an extraordinary meeting with former Finance ministers to review the fiscal picture. The political signal is deliberate: seek technical backing from figures with institutional pedigree to lend credibility to a plan which, according to the MEF itself, does not contemplate a return to the 1.5% deficit before 2028. Former minister Dionisio Borda issued public recommendations aimed at a new convergence plan, while another former official warned that the state's arrears could reveal a fiscal problem of a structural, rather than cyclical, nature. That distinction is critical: if the structural diagnosis prevails, the correction will require measures of greater scope than a simple cash-flow adjustment.

The MEF's response on the revenue side was equally telling. The ministry explicitly ruled out new taxes and announced instead a review of exemptions and special regimes — a strategy that the Dirección Nacional de Ingresos Tributarios (DNIT), the new entity born from the merger of the Undersecretariat of Taxation and the Customs Directorate and one of the flagship institutional reforms of the Peña era, is already executing as part of the preparatory work for the 2027 General Budget. The DNIT also announced an agreement with the Banking Association (Asoban) to share data and improve controls and credit analysis, a step that combines the revenue function with financial-system oversight. To ease tax compliance, the DNIT will lower the interest rate applicable to installment tax payments starting in September.

The financial-sector picture offers the sharpest counterweight to the fiscal pressure. According to the BCP, credit to the private sector grew 14.4% in June, while deposits advanced 19.4% — figures that reflect genuine financing demand and an expanding savings base. The economy grew 5.8% in the first quarter and 5.1% in the first four months of the year, with the BCP highlighting a solid, diversified expansion. Market participants raised their growth estimate for the year to close to 5%, while ECLAC held its projection at 4% and the IMF projects that Paraguay will grow at nearly twice the pace of the world economy. Remittances, totaling US$732 million annually, continue to underpin consumption and the real estate sector, and the Agencia Financiera de Desarrollo (AFD) is preparing new credit lines and guarantees for industry.

On the energy front, Peña set a 30-day deadline for the Energy Roundtable to establish clear rules for investors, following the leadership change at the Administración Nacional de Electricidad (ANDE). The entity carries two unfulfilled promises — the issuance of its own bonds and the sale of energy from the Acaray plant to Brazil — while managing a debt-recovery program of more than US$116 million under the "Ñande Ahorro" label, whose validity was extended. Itaipú, for its part, increased power supply to ANDE by 19.4% between January and July. In fuels, private-label operators applied their fourth price adjustment of the year, with cumulative hikes of up to 39%, while Petropar held its prices, preserving a differential that acts as a cushion for lower-income consumers.

On the trade front, Taiwan's foreign minister mentioned efforts to increase imports of Paraguayan soy, a signal that the agricultural rapprochement with Taipei is advancing in parallel with the EU-Mercosur agreement negotiations, where Paraguay is demanding parity on access quotas. The announced merger between the Catedral and Farmacenter chains — a consolidation in the pharmacy retail sector — stands as the most relevant corporate move of the day in the local market.

In the coming weeks, observers should watch two variables closely: the opening of the creditor bid-reception window announced by the MEF, which will indicate the cost at which the government can refinance its obligations in the local market — where Treasury bonds already reach US$1.2 billion outstanding — and progress on the Caja Fiscal reform in Congress, whose passage with modifications could come this very week, according to Chamber of Deputies President Hugo Velázquez. A package of seven additional economic bills was also announced, suggesting that the government is trying to sustain reform momentum despite the fiscal pressure now dominating the agenda.

**Catedral / Farmacenter (not listed on international markets)** — The Paraguayan pharmacy retail chains Catedral and Farmacenter announced their merger, in what represents the sector's most significant consolidation in recent years. The transaction would concentrate a meaningful share of the domestic pharmacy market at a moment when domestic consumption is being sustained by remittances and credit expansion.

**Agencia Financiera de Desarrollo — AFD (public entity)** — The AFD is preparing new credit lines and guarantees targeted at the industrial sector, in line with its current investment-grade rating. The initiative seeks to channel financing toward manufacturing, one of the segments that most contributed to the economic growth recorded in the first half.