IMF flags 3.5% fiscal deficit as Paraguay's 2027 budget faces unprecedented scrutiny

The International Monetary Fund has raised red flags at a particularly awkward moment for Santiago Peña's government: just as the 2027 General Budget faces unprecedented scrutiny from economists, business associations and former officials, the multilateral body has laid bare a fiscal deficit equivalent to 3.5% of GDP and warned about outstanding debts that threaten the sustainability of public finances. The convergence of this external signal with the domestic budget debate turns fiscal policy into the dominant theme of the day and confronts the government with a question it can no longer sidestep: is it building a bridge toward consolidation, or simply passing the problem on to the next administration?

The 2027 PGN, presented with projections that include GDP growth of 4.2%, inflation of 3.5%, a tax-to-GDP ratio of 11.2% and an exchange rate of G. 6,458 per dollar, has drawn an almost unanimously critical response from independent analysts. Former minister Manuel Ferreira warns of what he calls "financial makeup" in the figures, while another former vice minister describes the current fiscal management as the worst since 2003 and casts doubt on the feasibility of meeting the deficit target for 2028. Economist Dionisio Borda, one of the country's most respected voices on fiscal matters, argues bluntly that the budget shifts the problem to the next administration — a reading that carries particular political weight as the electoral cycle approaches. Última Hora reminds readers that the fiscal responsibility law has been complied with only three times since its enactment, which turns the official goal of returning to the 1.5%-of-GDP ceiling into something that requires, in economists' own words, an immediate action plan rather than a deferred promise.

The tension between the official narrative and fiscal reality is sharpened by two simultaneous phenomena. On one hand, the 2027 PGN envisions borrowing of up to USD 2 billion to cover the deficit, in a context where public debt already stands at around 35% of GDP, or roughly USD 22.2 billion. On the other, the Ministry of Economy and Finance has just opened the bid reception window for creditors on a new bond issuance in the local market, where Treasury paper already accounts for close to USD 1.2 billion in circulation. The new minister, Óscar Lovera, has said he will prioritize debt management and has ruled out a broad tax hike, though he confirmed that existing tax exemptions will be reviewed — a semantic distinction that has failed to persuade the business associations.

The Unión Industrial Paraguaya, the Cámara de Anunciantes del Paraguay and the Cámara de Productores have flatly rejected any increase in the tax burden, calling instead for a rationalization of public spending. The budget rigidity underlying this discussion is structural: wages, retirements, pensions and debt service account for nearly 70% of the total budget, leaving genuinely narrow room for maneuver on any adjustment that does not run through a deep reform of public employment or a reduction of pension commitments — both politically costly options.

Against this backdrop, a strong guaraní and a weak dollar add a further layer of complexity. The exchange rate projected in the budget has been described by economists as an "illusory view," given that the guaraní's strength in FX markets is already eroding the export sector's competitiveness. Exporters warn that the dollar's decline is hitting their guaraní-denominated costs directly, while the budget's projections rest on a parity many analysts consider optimistic. Paraguay maintains a country risk of just 107 basis points, among the lowest in the region, reflecting the strength perceived from abroad — but that same IMF that acknowledges the country's macro-structural soundness is the one now flagging the 3.5% deficit in cautionary terms.

On the energy front, unions at the Administración Nacional de Electricidad are pushing back against the bills that would create an Energy Ministry and an independent regulator, while an internal statement from the sector candidly admits that "we know what to do, but not how" — a phrase that captures the institutional vacuum surrounding the electricity reform. Meanwhile, estimates of ample natural gas reserves in the Carandayty area of the Chaco open a medium-term prospect that could significantly diversify the country's energy and fiscal matrix, although these remain preliminary projections for now.

What comes next is decisive. Congress will have to debate the 2027 PGN with the business community in rejection mode, an IMF in watchdog stance, a central bank that has already tightened its policy rate and an export sector bruised by currency appreciation. Minister Lovera's visit to international institutions in France will offer clues as to how the government intends to position the fiscal narrative before global markets. And if the government ultimately opts to touch tax exemptions, the reaction of the affected sectors will mark the first major political test of the post-Ferreira Brusquetti era in the country's economic leadership.