Paraguay's Growth Masks Rising Debt and Wage-Driven Inflation Risks

Paraguay faces an increasingly sharp fiscal dilemma: an economy growing vigorously but accumulating debt pressures, wage-related disputes, and structural tensions that threaten to erode the very foundations of the stability it so carefully showcases to international markets.

The Banco Central del Paraguay put GDP growth at 6.6% for 2025, a figure the institution's head attributed not to a stroke of luck but to "a long process" of reforms and macroeconomic discipline. Economic activity accelerated in April with simultaneous momentum from services, energy, and agriculture, sectors that the Ministry of Economy and Finance identified as the pillars of performance in the early part of the year. The indicator expanded 5.1% in the first four months of the fiscal year, according to La Nación, while the fiscal deficit remained contained at 0.9% of GDP through May, a threshold the MEF considers consistent with its committed consolidation path. Paraguay trades at a country risk of just 104 basis points, a level that reflects market confidence but which, as ABC Color notes, still confronts deep-seated challenges.

That confidence, however, comes at a rising cost. Public debt grew by $1.333 billion in just four months, and external debt service for the Central Administration allocated 67.5% of payments to interest —16.8% more than the previous year— according to MEF data cited by ABC Color. The government has simultaneously opened a window for creditor offers and is weighing a new bond issuance in the local market, where Treasury securities already total roughly $1.2 billion outstanding. Itaipú, which transferred $462 million to the Paraguayan state in 2025, and family remittances, which inject some $732 million annually into the economy, remain off-the-books funding valves that cushion cash needs. At the same time, social spending accumulated $2.59 billion through May, according to the MEF itself, while the Caja Fiscal posted a $182 million deficit over the same period — pressure that Congress is trying to ease through a pension reform that Chamber of Deputies President Raquel Alliana promised to enact this week with modifications.

The construction sector adds an urgent demand to this picture: state debt to construction firms exceeds $300 million, including pending interest, and the sector is waiting for the new Economy Minister, Óscar Lovera, to prioritize payments. The MEF disbursed close to $10 million to suppliers in recent days, but builders warn the amount is insufficient to normalize the payment chain. Meanwhile, electricity consumption grew 19.4% in the first five months of 2026, according to ANDE, a sign that industrial and commercial activity is maintaining genuine traction.

The day's hottest debate revolved around the minimum wage. President Santiago Peña, as ABC Color reported, had to respond directly to business leaders who questioned the 5% increase — a decision adopted after the Comisión Nacional de Salario Mínimo failed to reach consensus and elevated the matter to the Executive. The Labor Minister argued that the adjustment will generate "a virtuous circle," but economists consulted by ABC Color sharply disagreed: the increase, they said, has limited impact on formal workers, encourages informality —which, according to Última Hora, already borders 46% of GDP— and may pass through to prices in an economy where inflationary pressure is already present. The Asociación de Industriales Metalúrgicos y Conexos del Paraguay (Asimcopar) was more blunt: an adjustment lacking technical criteria stalls investment. Unions, for their part, branded the 5% a "scam" and argued that the minimum wage functions in practice as a ceiling, not a floor.

The institutional architecture underpinning these decisions is still being built. According to the analysis published by Hoy, two structural laws of the Peña era define the new framework: the creation of the Ministry of Economy and Finance —which absorbed the Ministry of Hacienda, the Technical Planning Secretariat, and the Civil Service Secretariat— and the merger of the Tax Undersecretariat with the Customs Directorate into the new Dirección Nacional de Ingresos Tributarios (DNIT). Óscar Orué, who leads the DNIT, has pledged to lift the tax burden from 10% to 12% of GDP and increase revenue by some $400 million annually, though the agency already anticipates a negative impact from the dollar on second-half revenues, which it hopes to offset with a rebound later in the year. The geographic concentration of economic activity —flagged by a researcher in ABC Color— remains a structural vulnerability that no administrative reform can correct on its own.

In the coming weeks, three focal points will dominate attention: the definition of the 2026 budget, whose draft already reflects increases and cuts that reveal the government's priorities; the evolution of the exchange rate and a possible intervention by the Banco Central del Paraguay in the foreign exchange market, whose appropriateness is being debated by economists cited by ABC Color; and the progress of the Caja Fiscal reform in Congress, whose outcome will determine whether the pension deficit stabilizes or continues to widen. The IMF, which praised Paraguay for advancing toward a "more equitable and prosperous economy," and Spain, which highlighted the country's stability as an investment platform, are watching with interest. The credibility earned in the markets —those 104 basis points of country risk— now hinges on the government's ability to demonstrate it can simultaneously manage growth, debt, and a labor market that continues to leave the majority of workers outside the formal economy.