Paraguay's growth masks structural fiscal crisis as deficit heads toward 3.9%

As Santiago Peña's government marks its third year in office, Paraguay presents one of the most striking macroeconomic paradoxes in South America: an economy that the Central Bank reports is growing at 6.6% year-on-year, backed by Moody's reaffirmation of its investment grade and IMF recognition of the model's soundness, yet with public accounts that a former deputy finance minister has called the "worst fiscal management since 2003." This tension between real growth and deteriorating budgetary management is the defining feature of the country's economic moment, and what sets today's Paraguayan debate apart from that of its regional neighbors.

The activity figures are indeed remarkable. The Central Bank reported that GDP grew 5.8% in the first quarter of the year and 5.9% in the first half, consolidating an expansionary cycle that began in 2022. Activity has accumulated growth of 5.6% through August, with every sector in positive territory, and economic agents surveyed by the BCP project that the year will close at around 5%. The soy complex injected USD 3.513 billion into the economy through July, while remittances from abroad added USD 732 million annually, feeding the real estate market and household consumption. Foreign direct investment continues to diversify, and the recent arrival of CIRSA, an international gaming and entertainment operator, adds another chapter to the sectoral opening process.

Beneath that gleaming surface, however, the fiscal architecture is accumulating strains that several analysts consider structural. Public debt grew by USD 1.498 billion in just six months, and interest payments are already up 12.9%, a pace that is eroding budgetary space. The Ministry of Economy and Finance itself acknowledged that it does not expect to return to the 1.5% deficit limit set by the Fiscal Responsibility Law until 2028, with an interim stage that could place the deficit at 3.9% of GDP in 2027. The MEF is analyzing amendments to that ceiling law, which in practice would legally accommodate a situation that has already overshot the original parameters. The new Economy Minister, Óscar Lovera, has publicly acknowledged that the budget can only be brought back on track in 2028, once accumulated debts are settled. Former ministers called into the public debate have warned that runaway current spending is the underlying problem, noting that GDP growth is not enough to offset the expansion of state liabilities.

The 10.4% drop in customs revenue is perhaps the most puzzling symptom of the moment: the guaraní has remained strong — which favors imports — yet tariff income is falling, exposing a contradiction difficult to resolve without affecting exchange-rate competitiveness. At the same time, cucumber producers are denouncing that contraband is saturating their market, while the Social Security Institute (IPS) concentrates more than 70% of its certificates of deposit in a handful of banks, a concentration risk that concerns auditors of the financial system. The price of beef has risen nearly 30% in three years, squeezing consumption for lower-income households according to the Paraguayan Chamber of Supermarkets, underscoring that macroeconomic growth has not permeated the population uniformly.

Against that backdrop of fiscal strain, the Peña government has opted for a sweeping institutional overhaul. The creation of the National Tax Revenue Directorate — a merger of the Tax Undersecretariat and the Customs Directorate — seeks to raise the tax take from 10% to 12% of GDP and add USD 400 million in annual revenue. The DNIT has already begun tightening controls and digitizing services, including a reduction in the interest rate for installment tax payments starting in September. Even more ambitious is the bill Peña has sent to Congress to create a Ministry of Mines and Energy along with a regulator for the electricity sector — a reform that would respond to the opacity that has historically surrounded the binational entities Itaipú and Yacyretá. The latter reported having avoided losses of PYG 243.015 billion over three years, a figure the government touts as evidence of management improvements. On the foreign trade front, Paraguay is negotiating equitable quota conditions within the European Union-Mercosur agreement, and Taiwan's foreign minister actively highlighted that market's efforts to import Paraguayan soy — a commercial diversification that takes on strategic relevance in the current context of global geopolitical tensions.

What investors and analysts will need to watch in the coming weeks is whether Congress approves the Fiscal Fund (Caja Fiscal) reform — which Alliana pledged to enact with modifications this very week — since its success or failure will determine the credibility of the fiscal consolidation path the MEF has committed to before international markets. Also key will be the outcome of the Energy Ministry bill and the new electricity regulator, whose approval could unlock private investment in a historically closed sector. In the local capital market, Treasury bonds already total USD 1.2 billion in circulation and the government is looking to issue new debt; the reception of that offering in an environment of still-restrictive international rates will be the most precise gauge of the real confidence the market places in Paraguay's ability to deliver on its promised adjustment.

**ueno (privately held)** — The Paraguayan fintech recorded a software investment that triples the combined technology outlays of nine local banks, an unusually large-scale bet for the domestic financial system aimed at consolidating its position in the regional digital payments market.

**IPS (public entity)** — The Social Security Institute concentrates more than 70% of its certificates of deposit in a small number of local banks, an exposure that financial sector analysts identify as a material systemic risk for the country's largest pension fund.

**CIRSA (privately held)** — The Spanish entertainment and gaming operator confirmed its entry into the Paraguayan market with a global-scale investment, citing the country's legal certainty as a determining factor, in a move that broadens the diversification of foreign direct investment flows beyond the agricultural and energy sectors.