Paraguay's Growth Masks Fiscal Crisis as Debt Balloons Unchecked

President Santiago Peña convened former finance ministers this week to assess the deterioration of public accounts — an institutional alarm bell that lays bare the central contradiction of Paraguay's economic moment: a country that is growing, but spending more than it can afford.

The annualized fiscal deficit stands at 2.6% of GDP, or roughly $1.7 billion, according to figures published by ABC Color, while public debt has grown by $1.498 billion in just six months. Central government wage spending rose between 7.7% and 9.9% through July, already absorbing 53% of tax revenues, and interest payments on debt climbed 12.9% over the same period. Wages, pensions, retirement benefits, and debt service account for nearly 70% of budget rigidity, leaving increasingly narrow room to maneuver. A former deputy economy minister described the current fiscal management as the worst since 2003 and cast doubt on the government's official target of bringing the deficit back to 1.5% of GDP by 2028. Another former minister warned that $280 million in debts simply did not appear in the records of the Ministry of Economy and Finance — a disclosure that, if confirmed, would point to a fiscal problem that is structural rather than merely cyclical.

The MEF, for its part, ruled out new taxes and instead announced a review of exemptions to strengthen revenue collection. The institution is targeting 2028 to return to the ceiling set by the Fiscal Responsibility Law, whose amendments remain under analysis. CAF confirmed this week that it will expand its private financing arm in Paraguay — a vote of institutional confidence that arrives just as the government looks to close on new debt through bond issuance, having already opened the window for creditor bids. Local-market Treasury bonds outstanding total roughly $1.2 billion. For international markets, credibility around fiscal path compliance will be decisive: an economist cited by ABC Color put it with clinical precision, noting that "the yellow lights are flashing" and that the government must act before the deterioration slides into a confidence crisis.

The paradox is that the real economy continues to show vigor. The BCP reported GDP growth of 6.6% in 2025, the first quarter posted expansion of 5.8%, and market participants estimate 2026 will close at around 5%. The IMF highlighted the country's economic solidity, though with warnings on the downside risks. The soy complex injected $3.513 billion into the economy through July, exports of manufactured goods grew 35% year-to-date, and remittances contributed $732 million annually. Consumer credit leads the banking portfolio at $6.020 billion, reflecting active domestic demand — but also rising household indebtedness that has prompted the government to propose financial education programs.

The tension between growth and fiscal discipline is mirrored in the energy agenda, which is emerging as the other major structural challenge of Peña's three-year term. Electricity consumption grew 18.2%, exposing the urgency of accelerating ANDE's infrastructure buildout. A bill has been introduced to split the utility into six companies, while former officials have warned that creating new institutions alone will not resolve the crisis. The government published the draft framework for the Energy Regulatory Entity and opened it to public consultation. Atome, a company that has held a contract with ANDE since 2022, announced feasibility studies for a 300-megawatt peak solar plant, though without dispelling doubts about its $70 offer to the state entity. Meanwhile, employees at the Yacyretá binational utility are doubling their salaries through overtime, adding further pressure to sector-linked public spending.

On the external front, the Unión Gremial de Productores warned that new European Union regulations could become trade barriers for Paraguay, just as the country negotiates the terms of the EU-Mercosur agreement and demands parity in quotas. Weather and costs, meanwhile, are pressuring the upcoming Mercosur agricultural campaign, against a backdrop of low river levels threatening fluvial transport. The World Bank approved a $300 million loan to support a more resilient economy, and Paraguay continues to advance in diversifying its foreign direct investment sources.

Next week will be marked by the congressional vote on the Caja Fiscal reform which, according to Chamber of Deputies President Raquel Alliana, will be enacted with modifications. That reform is a key piece for containing one of the most rigid lines of the budget. Any political dilution of its scope will deepen doubts about the fiscal trajectory and complicate the reading international markets make of a country that, three years into the Peña administration, is growing solidly but has yet to convince investors it can finance that growth sustainably.

**Atome Energy (listing on international markets not confirmed)** — The company is defending its 2022 contract with ANDE for energy supply and has announced the start of feasibility studies for a 300 MWp solar plant in Paraguay, without addressing regulatory doubts about its $70 per MWh purchase offer. The transaction is under public scrutiny amid the ongoing restructuring of Paraguay's electricity sector.

**Ueno (local financial institution, no international listing)** — Ueno's stake in "other companies" surged by 8,000% according to its balance sheet, while the firm holds $353 million in a trust — equivalent to nearly 100% of its equity. The Banco Central del Paraguay is also investigating whether the firm has bypassed regulatory provisions on software investments.

**CAF – Development Bank of Latin America (active issuer in international capital markets)** — CAF confirmed the expansion of its private financing arm in Paraguay, increasing its exposure to the country at a moment when the government is seeking additional financing through sovereign bond issuance in both local and international markets.