Growth and hidden fiscal rot: Paraguay's widening economic paradox

The tension between Paraguay's strong macroeconomic numbers and the fiscal cracks beneath them has never been more visible than at this moment: economic activity grew 5.6% through May and the International Monetary Fund projects an expansion near double the regional average, yet customs revenue has accumulated a 10.4% drop for the year, the Ministry of Economy and Finance is targeting 2028 to return to a fiscal deficit of 1.5% of GDP, and a former minister has revealed that a $280 million debt was not listed in the official records. It is precisely this gap — the one opening up between the dynamism of the real economy and the fragility of the public accounts — that defines Paraguay's current moment.

The activity data are genuinely solid. According to the Banco Central del Paraguay, services and agriculture led growth through May, and private-sector analysts polled are raising their full-year expansion estimates toward 5%. The IMF backs that optimism, noting that Paraguay will grow almost double the global average despite the deteriorating external environment. Family remittances, which reached nearly $500 million through May and are projected around $732 million annually, continue to underpin consumption and drive the real estate market. Consumer credit is following suit. The World Bank, for its part, has just committed $300 million to support a more resilient economy — a vote of external confidence that aligns with the BB+ rating Fitch Ratings maintains for the country.

Fiscal space, however, is narrowing. The 10.4% drop in customs revenue year-to-date has slowed the growth of receipts at the Dirección Nacional de Ingresos Tributarios, the merged institution that resulted from the union of the Subsecretaría de Tributación and the Dirección de Aduanas — one of the most ambitious institutional reforms of the Peña era. Óscar Orué, director of the DNIT, at one point pledged to lift the tax take from 10% to 12% of GDP and add roughly $400 million in annual revenue; the customs numbers suggest that path will be longer than expected. In parallel, the DNIT has cut interest rates for installment tax payments starting in September, a concession that may broaden the taxpayer base but also caps immediate revenue flows.

The situation gets more complicated on the spending side. Public debt interest payments grew 12.9%, provincial governments and municipalities received $1.6 million less in royalties from the binational dams, and state arrears with suppliers — including the pharmaceutical sector — keep piling up. President Santiago Peña convened former finance ministers to analyze the deficit and state debts, a signal that concern is real. The new Economy Minister, Óscar Lovera, has sketched out his priorities, including the elimination of 30 divisions within the ministry and an internal salary reorganization — streamlining measures aimed at reducing current spending, though their fiscal impact will be gradual. The horizon set is 2028 to return to the 1.5% deficit ceiling contemplated in the fiscal rule.

On prices, July registered deflation for the second consecutive month, pulled down by declines in food and other categories, according to the Banco Central del Paraguay. But that disinflation coexists with an escalation in fuel prices that has already logged four upward adjustments this year, with increases of up to 39% according to ABC Color. Private-label service stations have implemented the fourth adjustment while Petropar has announced it will hold its prices — creating a widening divergence between the state and private sectors with clear political implications, given that legislators with ties to the Petropar service-station network have pushed to keep that gap in place.

The labor market offers its own internal tension. Unemployment fell, but underemployment rose. Informal employment exceeded 1.75 million people in the second quarter, a figure that confirms Paraguay remains among the countries with the highest labor informality in Latin America and the Caribbean, according to Instituto Nacional de Estadística data. Micro, small and medium-sized enterprises employ nearly 80% of the workforce, meaning the formal productive base is still insufficient to absorb demographic growth with quality jobs.

In capital markets, the return of Treasury bonds to the local stock exchange, with a stock already reaching some $1.2 billion, opens the possibility of deepening the domestic debt market and reducing dependence on international markets. The stated ambition is to double the stock market's weight in the economy by 2030. On the external trade front, Taiwan's foreign ministry publicly spoke of efforts to increase imports of Paraguayan soy, while Paraguay negotiates its position in the European Union-Mercosur agreement demanding equity in quotas.

The items to monitor in the coming weeks are the trajectory of customs revenue and whether the DNIT can reverse its decline, the parliamentary progress of the fiscal fund reform which, according to Chamber of Deputies President Raquel Kober Alliana, could be passed with modifications in the coming days, the impact of new fuel prices on August inflation, and the possible financial and technical audit that Dinac could launch on Paranair — a sign that the private aviation sector is also facing viability strains. The gap between the narrative of macroeconomic solidity and the accumulated pressure on the public accounts will determine whether Paraguay can maintain the confidence of international organizations without sacrificing the pace of growth.

**Catedral and Farmacenter (privately held)** — The two Paraguayan pharmacy chains announced their merger, an operation that consolidates the health retail sector in a context where the State maintains significant debts with the pharmaceutical sector; Cifarma, which represents suppliers to the public system, said it accepts the assignment of that debt under the principle that "something is better than nothing."

**ANDE (state-owned enterprise)** — The state electricity distributor extended its "Ñande Ahorro" program after managing debts of more than $116 million, an extension that reflects the financial pressure facing the company in a year in which experts warn that Paraguay is racing against the clock to head off a possible energy crisis by 2030 if it does not accelerate investments in generation and distribution capacity.