Paraguay's phantom $280 million debt exposes fiscal crisis behind growth miracle.

Paraguay's public debt grew by USD 1.498 billion in the first half of the year alone, and a USD 280 million line item that did not appear in the Ministry of Economy and Finance's records was uncovered during the account review process: this is the data point dominating the country's economic conversation today, and it forces every other signal — robust growth, a strong guaraní, institutional reforms — to be read in a more uncomfortable light.

President Santiago Peña, marking three years in office, convened former Finance Ministers to jointly analyze the fiscal deterioration. The gesture is unusual and politically revealing: it acknowledges that the problem exceeds official rhetoric. The former Vice Minister of Economy described the situation as the "worst fiscal management since 2003" and cast doubt on the target of reducing the deficit to 1.5% of GDP by 2028, a horizon that new minister Óscar Lovera publicly reaffirmed as the objective but conditioned on the prior settlement of accumulated liabilities. Interest on public debt grew 12.9% in the period under review, central government wage spending rose 9.9%, and salaries, pensions, retirements and debt service now account for nearly 70% of budget rigidity. Since coming into force, the Fiscal Responsibility Law has been complied with in only three years.

The paradox is striking. The BCP reported GDP growth of 6.6% in 2025, the economy grew 5.6% in the first half driven by agriculture, services and construction, exports expanded 26% with industry as the main engine, and the soy complex injected USD 3.513 billion into the economy through July. The IMF highlighted the country's economic strength. Market agents raised their optimism toward growth of around 5%, and Paraguay is positioning itself as one of the fastest-growing economies in the region according to the World Bank. Yet consumer confidence sat in pessimistic territory, unemployment is rising in Asunción and in the Central department despite the expansion, and the underground economy — estimated at between 35% and 46% of GDP depending on the source — continues to grow. Macroeconomic dynamism coexists with a distribution of its benefits that fails to reach citizens with sufficient clarity, as several economists interviewed by local media acknowledged.

Against that backdrop, this week's debate on tax policy took on unusual density. The president of the Chamber of Deputies, Hugo Velázquez Moreno, known as Ovelar, presented a proposal to raise taxes to finance the 2027 General Budget of the Nation. The Dirección Nacional de Ingresos Tributarios — heir to the merger between the Subsecretaría de Tributación and the Dirección de Aduanas, one of the flagship institutional reforms of the Peña era — ruled out new taxes and announced instead a review of tax exemptions to strengthen revenue collection. The MEF pointed in the same direction. The DNIT will also, starting in September, reduce the interest rate for installment tax payments, a measure aimed at encouraging voluntary compliance. The current tax burden hovers around 10%, and the institutional target is to raise it to 12% without touching VAT or Personal Income Tax rates — instruments that the economists interviewed by ABC Color consider untouchable given their regressive impact. The focus, instead, is on broadening the tax base and cutting sectoral privileges. Several analysts warned that raising rates before reviewing public spending would be a political and economic sequencing error.

The energy sector added another layer of structural pressure to the picture. Paraguay has secured energy supply only through 2030, and building new plants requires between 10 and 14 years, sector technicians warned. The engineers' guild argued that the State will not be able to finance the required new infrastructure on its own. Large industrial energy consumers called for clear rules through 2037 to plan investments. The firm Atome presented ANDE with a tiered tariff proposal of up to USD 37 per megawatt-hour along with the development of a solar plant in Villeta, in what constitutes one of the most concrete private generation proposals put forward in the past year. ANDE, meanwhile, has yet to specify when it will define its tariff adjustment, though the matter is formally on the agenda. In parallel, fishermen announced a protest outside Yacyretá's facilities over the lack of response to their demands, reflecting the social tensions surrounding the large binational dams, whose energy and fiscal contribution remains central to what the government calls a "war economy."

The central bank held its benchmark rate at 5.50% amid new external pressures, an expected decision but one that underscores caution given the combination of El Niño — which threatens food inflation through its impact on fertilizers and harvests — and global volatility. The guaraní remains strong against the dollar, which benefits importers and consumers of tradable goods but hurts exporters and the agribusiness sector. Remittances, which reached USD 732 million on an annual basis, continue to fuel consumption and the real estate market. Local Treasury bonds outstanding reached USD 1.2 billion, and the government actively explored placing new debt in international markets, with the MEF opening a formal window to receive offers from creditors.

The reform of the Caja Fiscal advanced in Congress with modifications, and its passage is expected this week. The deficit of that pension system is already approaching USD 250 million accumulated through July, with interest collected representing barely 12% of the shortfall. It is the most costly structural legacy that any budget discussion will have to confront in the coming years.

What to watch in the weeks ahead: the scope and impact of the tax exemption review that the MEF will formally announce, final approval of the Caja Fiscal reform and its terms, ANDE's tariff decisions and their effect on industrial competitiveness, and the trajectory of public debt in a context where the government is simultaneously seeking to issue new bonds and convince markets that it has a credible path toward fiscal consolidation by 2028.