Paraguay's Growth Masks Fiscal Crisis, Threatening Regional Stability Narrative

Paraguay is navigating a moment of tension between its solid macroeconomic indicators and a series of fiscal and structural fragilities that Santiago Peña's government has yet to fully resolve, against a backdrop in which country risk holds at just 104 basis points even as pressures on public spending intensify on multiple fronts.

The Banco Central del Paraguay reported GDP growth of 6.6% in 2025, driven by what the BCP itself called a "war economy," in which the Itaipú and Yacyretá hydroelectric plants played a pivotal role as foreign-currency generators and engines of energy-sector activity. Economic activity accelerated in April on the combined push from services, energy and agriculture, and the BCP highlights a solid and diversified expansion that positions Paraguay as the country with the strongest growth outlook in the region. By year-end, private economists and market participants estimate growth could exceed 5%, in line with central bank projections — a figure the IMF also endorses while flagging the strength of the Paraguayan economy, albeit with warnings about latent risks.

The fiscal picture, however, is far from reassuring. The Caja Fiscal deficit reached USD 182 million in the first five months of the year, while the overall fiscal deficit stood at around 0.9% of GDP through May, according to the MEF, but economists consulted by ABC Color warn that the government will struggle to meet its target without significant budgetary adjustments. Public debt grew by USD 1.333 billion in just four months, and the State is processing additional external credits worth more than USD 1.6 billion, while the government seeks to finalize a new bond issuance in the local market, where Treasury securities already total roughly USD 1.2 billion outstanding. Analysis cited by ABC Color further notes that the budgeted exchange rate helped dress up the deficit at 1.5%, raising doubts about the real soundness of public accounts under the "war economy" framework.

Fiscal strain is mirrored in the State's relationship with the private sector. Debt owed to the construction sector tops USD 300 million, including pending interest, and MSMEs are publicly questioning why the State fails to pay its bills even as tax collection grows. The MEF made partial payments to suppliers totaling close to USD 15 million in recent disbursements, but construction firms are pressing for the State to absorb factoring interest as a condition for accepting that payment mechanism. In parallel, the health sector is darkening the spending outlook: the Instituto de Previsión Social will request an additional one trillion guaraníes for its 2027 budget, with its health fund in critical condition.

The debate over the minimum wage, recently adjusted, has split opinion. The Labor Minister argues the increase will spark a virtuous cycle of consumption and formalization, a stance the BCP backs with consumption-expansion data of 4.8% in the first quarter. But the Cámara de Importadores y Comerciantes del Paraguay — Asimcopar — warns that a hike lacking technical criteria deters investment, while economists caution the impact will be limited and could fuel informality and prices. The underground economy already accounts for roughly 46% of GDP, according to recent estimates, a figure that lays bare the limits of formal labor policy.

On the energy front, fuel prices keep climbing steadily, with private operators matching Petropar's rates, and no clear horizon for a near-term drop. ANDE, for its part, has yet to set a date to announce its tariff adjustment, although the 500 kV transmission line between Yguazú and Valenzuela is 65% complete, which would eventually expand electricity distribution capacity. The Atome project, however, is stirring controversy: analysts warn it could cost citizens an additional USD 1.6 billion — a sum that coincides, not without irony, with the value of external credits the government is processing simultaneously.

Family remittances continue to serve as a quiet cushion: they total USD 11.907 billion since 2008, with an annual flow of USD 732 million that underpins domestic consumption and real estate development. Agriculture and industry, meanwhile, sustained activity in the first half, with the soy complex generating USD 2.492 billion through May, according to La Nación.

In the weeks ahead, attention will turn to the vote on the Caja Fiscal reform — whose passage with modifications was previewed by the President of the Chamber of Deputies, Raúl Latorre, known as Alliana — to potential BCP intervention in the FX market amid dollar volatility, and to the signals to be sent by the new Economy Minister, Óscar Lovera, following his trip to Paris to meet with international organizations. The modernization of the stock market, which promises to double its weight in the economy by 2030, and the resolution of the wage debate will be key bellwethers of the Peña government's ability to sustain growth without compromising the stability that, for now, remains its main calling card on the world stage.