Paraguay's Growth Masks Fiscal Strains Testing Economic Resilience

Paraguay is navigating a moment of genuine expansion, yet one laden with fiscal and regulatory tensions that will test the resilience of the economic model championed by the Santiago Peña administration.

The Banco Central del Paraguay reported 5.8% growth in the first quarter of the year, a figure that economists surveyed by ABC Color suggest could hold above 5% by year-end, in line with mounting optimism among market participants. The BCP itself emphasized that the expansion is solid and broad-based, driven by services, energy, and agriculture. The soybean complex, the backbone of the export sector, generated USD 2.492 billion through May, while the Ministry of Economy and Finance noted that agriculture and industry sustained activity through the first half of the year. The country maintains a sovereign risk premium of just 104 basis points—one of the lowest in the region—and the International Monetary Fund has repeatedly acknowledged the strength of Paraguay's macroeconomic framework, though with caveats regarding the accelerated growth of consumer credit and external risks that should not be underestimated.

Even so, the dynamism narrative coexists with fiscal frictions of increasing weight. Public debt rose by USD 1.333 billion in the first four months of the year, and interest payments climbed 16.8%, a sign that borrowing costs are beginning to weigh on the public accounts. The Caja Fiscal posted a cumulative deficit of USD 182 million over five months, while the overall fiscal deficit reached 0.9% of GDP through May, according to the MEF. Analysts warned in ABC Color that the budgeted exchange rate was used to artificially compress the deficit to 1.5%, casting doubt on the accuracy of the official figures. The government, meanwhile, is processing external credits worth more than USD 1.6 billion and seeking to close new bond issuances in the local market, where Treasury securities in circulation already total roughly USD 1.2 billion.

The MEF announced the payment of around USD 10 million to state suppliers—a marginal figure against a debt to the construction sector exceeding USD 300 million. Small and medium-sized enterprises openly question the paradox: the state is collecting more, yet failing to honor its commitments. The DNIT, the entity created by merging the Subsecretaría de Tributación and the Dirección de Aduanas—one of Peña's flagship institutional reforms, as detailed by Hoy—reported nearly 30% growth in the collection of the Dividend and Profit Tax after tightening controls on discretionary reserves, lending partial credibility to director Óscar Orué's pledge to raise the tax burden from 10% to 12% of GDP and add USD 400 million annually to public coffers.

On the domestic front, the debate over the minimum wage concentrates the tensions between the business sector and the government. Asimcopar warned that increases lacking a technical basis discourage investment, while economists argue the inflationary impact would be limited but could deepen informality. The Banco Central again cut credit and debit card fees, a measure that supports consumption, though the IMF flagged concerns about the pace of retail credit expansion. Remittances, totaling USD 732 million annually, provide another pillar for domestic consumption and the real estate market.

On the energy front, public transport operators warned they may cease operations in response to rising fuel prices, in a context where private operators have already aligned their prices with those of Petropar, whose president did not specify when a potential reduction might occur. In parallel, the Atome project is generating controversy, with estimates suggesting it could cost consumers USD 1.6 billion, and ANDE has yet to define its tariff adjustment.

On the external side, Paraguay's economic openness runs 27 percentage points above the Latin American average, according to data published by ABC Color, and Senacsa downplayed the impact of a potential failure in the beef quota negotiations under the Mercosur-European Union agreement. The Minister of Economy and Finance traveled to Paris to meet with international organizations, at a moment when global markets are registering rising volatility.

Investors should closely track three variables in the coming weeks: legislative progress on the Caja Fiscal reform—which Chamber of Deputies President Raquel Llane de Alliana pledged to enact with modifications—the evolution of the exchange rate and possible BCP intervention in the FX market, and the ability of the MEF under its new minister, Óscar Lovera, to balance fiscal austerity with settling the accumulated debt owed to private-sector suppliers of the state.