Paraguay's 6.6% growth masks a hidden fiscal time bomb, experts warn.

As Santiago Peña's government marks its third year in office, the official narrative of a Paraguayan economic miracle collides head-on with a mounting body of fiscal data that former finance ministers themselves describe as the worst fiscal management since 2003, raising the most uncomfortable question Asunción now faces: can a country growing at 6.6% annually simultaneously be on the brink of a structural fiscal crisis?

The Banco Central del Paraguay held its benchmark rate at 5.50% this week, a decision that captures precisely that tension: economic activity expanded 5.6% in the first half, driven by agriculture, services and construction, and the BCP projects the year will close near 5%, with some market participants anticipating as much as 6.6%. The soy complex injected USD 3.513 billion into the economy through July, and remittances from abroad total USD 732 million annually, energizing the real estate market. The IMF and the IDB, in recent statements, highlighted the strength of macroeconomic fundamentals and sustained growth. From the outside, Paraguay remains a regional success story.

But the domestic numbers tell a different story. Public debt rose by USD 1.498 billion in just six months. Interest payments grew 12.9%. Wage spending in the central government expanded 9.9%. Salaries, retirement benefits, pensions and debt service already account for nearly 70% of budget rigidity, leaving fiscal maneuvering room that narrows each quarter. And the most disturbing revelation of the week is that a USD 280 million debt did not appear on the books of the Ministry of Economy and Finance, as former minister César Barreto admitted, in what various analysts characterize as an accounting transparency problem without recent precedent. Former Deputy Economy Minister Manuel Ferreira was more direct: he called the situation the "worst fiscal management since 2003" and dismissed as unrealistic the target of returning to a 1.5% of GDP deficit by 2028, defining it as a government "pipe dream." Independent economists cited by ABC Color warn that "the yellow lights are flashing and the government must act before a crisis."

President Peña this week convened former finance ministers to analyze the deficit and state debts, a signal that, far from reassuring, confirms the magnitude of the problem. The new Ministry of Economy and Finance —created in the early days of the current administration as one of its flagship institutional reforms, unifying the Treasury, Planning and Public Administration— has ruled out new taxes for now and instead announced a review of tax exemptions to strengthen revenue. The Dirección Nacional de Ingresos Tributarios, which emerged from the merger of the SET and Customs, has pledged to raise the tax burden from 10% to 12% of GDP, with a projected revenue increase of USD 400 million per year. But the debate over whether raising taxes is the right solution is open and divided: several economists warn that raising rates is not the most efficient path and call for reviewing public spending first, while others back selective increases but reject touching VAT and the Personal Income Tax.

The heart of the problem may be more structural than the government admits. Consumer confidence sits in pessimism territory, according to recent data. The underground economy is equivalent to between 35% and 46% of GDP according to various estimates, depriving the treasury of significant revenue. And the energy sector is flagging a medium-term crisis with direct economic consequences: Paraguay has secured energy only through 2030, new plants will take up to 14 years to build, the State cannot finance them on its own according to the engineers' association, and large industrial consumers are already demanding clear tariff rules at least through 2037. Atome this week proposed to ANDE a tiered tariff of up to USD 37 per megawatt-hour and a solar plant in Villeta, in what is beginning to shape up as a private energy investment market the country will urgently need to develop.

On the external front, Paraguay is negotiating its position in the European Union-Mercosur agreement, demanding equal quotas for its exports, while advancing the diversification of foreign direct investment. The guaraní continues to appreciate, which benefits importers and consumers but hurts commodity exporters; the BCP is weighing a response through reserve purchases and rate cuts to moderate that move. The threat of El Niño and the global fertilizer crisis add a food inflation risk that could complicate growth projections toward year-end.

What to watch closely in the coming weeks is the passage of the Caja Fiscal reform —expected this week with modifications, according to Chamber of Deputies President Raquel Alliana—, the MEF's opening of the offer reception period for a new bond issuance in the local market, and whether the 2027 budget will manage to correct the planning errors of the previous fiscal year. Paraguay's fiscal credibility with international markets, which maintain its investment grade, will depend largely on whether the government can demonstrate a credible path to budgetary balance before the yellow lights turn red.