Paraguay's growth masks fiscal pressures and energy crisis risks

The guaraní has been appreciating against the dollar for weeks, and the absence of the Banco Central del Paraguay's liquidity window has accelerated that decline in the exchange rate, according to economists cited by ABC Color, turning the currency's behavior into the most immediate symptom of a deeper tension running through Paraguay's entire economic landscape: a country that is growing vigorously but accumulating fiscal, energy and institutional pressures that complicate the government's triumphalist narrative.

Growth itself is not in dispute. The BCP reported GDP expansion of 6.6% in 2025, under what the government itself termed a "war economy," with the binational Itaipú and Yacyretá dams serving as energy pillars of that result. The economy has strung together 24 consecutive months of growth above 4%, according to La Nación Paraguay, and surveyed economic agents estimate the pace will hover around 5% this fiscal year. The IMF, for its part, has publicly highlighted the country's macroeconomic solidity, though with the customary warning about the need to broaden the tax base and improve collection efficiency—two flanks where Paraguay remains vulnerable. The current tax take is around 10% of GDP, one of the lowest levels in the region, and the newly created Dirección Nacional de Ingresos Tributarios—the product of the merger between SET and Customs conceived under the Peña era—has an explicit mandate to lift it to 12% and generate roughly $400 million in additional annual revenue.

But it is the 2027 General Budget that currently commands the most substantive debate. The Ministry of Public Works and Communications will receive a 33% to 34% increase in its allocation, with a physical investment portfolio that would reach $1 billion, according to ABC Color. The Health sector will also see its budget grow, despite the limited execution recorded in 2026. Analysts consulted by the same outlet, however, warn that the budget contains what former minister Manuel Ferreira called "financial cosmetics": central government wage spending has already grown 9.9%, interest payments on public debt rose 12.9%, and both the fiscal deficit and debt levels remain under congressional scrutiny. The MEF itself, now led by Óscar Lovera, has acknowledged that budgetary normalization will not occur before 2028, once accumulated arrears with suppliers in the health sector and pharmaceutical industry have been absorbed. Cifarma, the sector's chamber, accepted the debt assignment under the pragmatic logic that "something is better than nothing."

The gathering energy crisis is perhaps the most underestimated risk. The price of diesel has risen as much as 43.8% year-to-date, with a fifth round of increases underway among private distributors. Petropar, the state-owned company, maintains lower prices in a strategy that the private sector openly labels "political pricing" that distorts the market, according to ABC Color. The question circulating among operators is how long the state oil company can sustain that position without further eroding its financial standing. In parallel, negotiations between ANDE and British firm Atome over the addendum that would enable a green ammonia production project using hydroelectric power are at a critical juncture: the deadline expires in days and there is no official information on the state of the technical talks. An economist cited by ABC Color questioned the government's "improvisation" on this file, which involves potential clean foreign-exchange export earnings at a time when Paraguay is seeking to position itself in the global energy transition chain.

The meeting convened by President Santiago Peña and the BCP with private banking representatives brought another vector of tension to the table: confidence in the central bank. Analyst Manuel Ferreira publicly warned about the risk of eroding the BCP's institutional credibility, a signal that financial system participants are observing monetary policy moves with some unease, particularly in an environment where the U.S. Fed has raised its rate and the impact of that decision on capital flows and the cost of Paraguay's external financing remains under analysis. The MEF placed 230.527 billion guaraníes in Treasury Bonds in the latest auction, managing to lower rates, though economists noted that the smaller volume issued explains part of that favorable result. The local sovereign debt market in local currency now exceeds $1.2 billion in circulation.

On the external front, Paraguay is negotiating its position in the EU-Mercosur agreement, demanding parity in access quotas, while bilateral dialogue with Brazil on energy interconnection advances. The maquila sector continues to expand as a vector of industrialization under low-cost labor and tax schemes, and the annual flow of family remittances, estimated at $732 million, contributes increasingly to both domestic consumption and real estate development. The DNIT is also preparing a project to modify the tax regime applicable to electric vehicles, in line with the ambition to capture part of regional demand for clean mobility.

What will bear close watching in the coming weeks is the outcome of the ANDE-Atome negotiation, which will test the government's capacity to materialize clean-energy investment projects with export implications; the evolution of the exchange rate against a BCP that has opted to withdraw its liquidity window; and the congressional debate on the 2027 General Budget, where medium-term fiscal sustainability will be the central axis of scrutiny that already involves independent economists as well as legislators from the ruling bloc itself.