Paraguay's fiscal deficit doubles legal limit even as GDP growth hits 6.6%

As Santiago Peña's administration marks its third anniversary, Paraguay confronts a paradox no official headline can obscure: the Central Bank reports GDP growth of 6.6% in 2025 — with market participants projecting expansion of close to 5% for the full year — while the Ministry of Economy and Finance concedes that the fiscal deficit will close near 3.2% of GDP, more than double the 1.5% legal ceiling set by the fiscal responsibility rule. The growth is real. So is the deterioration of the public accounts. And the question dominating the debate today is which of the two will prevail over the medium term.

Public debt increased by USD 1.498 billion in just six months, and interest payments grew between 12.9% and 16.8% year-on-year depending on the measure — a sign that the cost of borrowing is already exerting structural pressure on the budget. The MEF has acknowledged that it will issue new debt to settle obligations with state suppliers, while maintaining that the total stock will stay below 40% of GDP. Óscar Lovera, the new Economy Minister — who has already laid out his priorities publicly and will meet with international agencies in France this week — is targeting 2028 as the horizon for resuming convergence toward the 1.5% deficit. Former minister Dionisio Borda and other economists warn that this date is too distant unless current spending is contained with urgency.

The map of fiscal disorder has a concrete geography. The Ministry of Health has accumulated a multi-million-dollar debt whose origin the Economy Minister himself had to explain publicly, while the MOPC — the infrastructure implementing agency — is awarding works at prices up to 81% above reference levels, according to documented complaints, and, with five months left in the year, shows a budget execution rate that analysts describe as insufficient. Social spending, for its part, grew 5% and reached USD 3.741 billion through July, according to the MEF — a figure the government presents as an achievement but which critics read as an expansion of current spending that will be hard to reverse. The Central Administration executed G. 39.6 trillion of its budget through July, a pace that raises red flags as the fiscal year approaches its close.

Against this backdrop, the week brings two economic policy developments with potentially far-reaching implications. The reform of the caja fiscal — the pension system for public employees, whose actuarial imbalance is a latent threat to the state's finances — will be enacted this week with modifications, according to Chamber of Deputies President Raquel Llanes de Alliana. And the government has announced a package of seven new economic laws, whose content has not yet been fully disclosed but which fits into the reformist push the executive is seeking to sustain ahead of the upcoming electoral cycle. Added to that picture is the de-indexation of the minimum wage, a proposal the Labor Minister plans to introduce in September and which, if implemented, would eliminate the automatic link between the minimum wage and past inflation — a structural change the business sector will applaud and the unions will resist.

On the energy front, President Peña gave the Energy Roundtable a 30-day deadline to set clear rules for investors, after replacing the head of ANDE. The decision comes at a moment of particular tension: experts warn of the risk of a "financial blackout" at Itaipú starting in 2027, when the current Annex C of the Treaty expires and Paraguay loses revenue from the energy ceded to Brazil. The magnitude of the potential impact — which some estimate in the hundreds of millions of dollars annually — makes the negotiation with Brasília the most underestimated fiscal risk variable on the medium-term horizon.

In the financial sector, IPS — the social security institute — concentrates more than 70% of its certificates of deposit in a handful of banks, an exposure the Superintendency of Pensions has described as excessive and requiring diversification. The DNIT, the new tax agency created by the merger of SET and Customs, signed a data-sharing agreement with the Banking Association (Asoban) to expedite controls and credit analysis — the first concrete operational result of the new institutional architecture. That same DNIT lowered interest rates for installment tax payments starting in September, a signal of openness toward taxpayers that contrasts with the revenue pressure the government needs to reduce the deficit. The stated goal of raising the tax burden from 10% to 12% of GDP — roughly USD 400 million in additional annual revenue, according to Director Óscar Orué — remains the greatest structural challenge for Paraguayan fiscal policy.

On the external front, Paraguayan chia regained normal access to the Japanese market after clearing sanitary controls, and Taiwan's foreign minister referenced Asunción's efforts to place soybeans in that market, while Paraguay negotiates the EU-Mercosur agreement quotas demanding equal treatment. Remittances, which reached USD 732 million annually, remain a quiet engine of consumption and the real estate market, while the World Bank approved a USD 300 million loan to strengthen the country's economic resilience.

What lies ahead deserves sustained attention on several fronts simultaneously: this week's vote on the caja fiscal reform will determine whether Congress has real appetite for structural reforms or whether it approves them with modifications that gut their content; the opening of the MEF's bond offer window will signal the terms on which Paraguay accesses capital markets at this moment of elevated deficit; and the 30-day deadline for energy rules will be the first test of whether the government can translate urgency into concrete regulation. The verdict on three years of Peña is, ultimately, that of a country growing faster than its neighbors but spending faster than it should — and whose window to correct that imbalance is narrowing.

**Catedral and Farmacenter (not listed on international markets)** — The two pharmacy retail chains announced their merger, which would consolidate Paraguay's pharmacy market under a larger-scale entity. The transaction has implications for medicine distribution in a country where access to healthcare is subject to active fiscal debate.

**IPS (public entity, not publicly traded)** — The social security institute concentrates more than 70% of its savings certificates of deposit in a small number of local banks, according to the Superintendency of Pensions, which called for greater diversification. The exposure poses systemic risks in a mid-sized financial system with limited counterparty diversification.

**ANDE (state entity, not publicly traded)** — Following the change at its helm, the state electricity distributor reduced its delinquency rate to 15.6% after reporting more than 25,000 clients to the Informconf credit bureau — an unusual step for a public company that signals a shift toward more commercial management criteria under the new leadership.