Paraguay Faces Fiscal Crossroads as Deficit Cap Slips to 2028

Paraguay · ECONOMY

With revenue below forecast and the 1.5% cap postponed, Paraguay must choose between gradual adjustment and a sharp 2028 cut.

Paraguay’s deficit is projected at 3.2% of GDP in 2026 and could reach 3.9% in 2027, returning to the 1.5% Fiscal Responsibility Law cap only in 2028, according to projections from the Ministry of Economy and Finance. The outlook, framed by Prensa Mercosur on 25 August 2026 citing economist Wildo González, captures what analysts describe as a Paraguay fiscal crossroads: correct gradually starting now, or concentrate a painful adjustment in a single year.

Deficit Cap Formally Postponed to 2028

The Ministry of Economy and Finance projects a fiscal deficit of 3.2% of GDP for 2026. For 2027, the projection rises to as much as 3.9% of GDP.

The government announced the postponement of the return to the 1.5% deficit target on 7 August 2026. Under that decision, the Fiscal Responsibility Law cap would bind again only in 2028.

The 1.5% ceiling is the anchor of Paraguay’s fiscal framework. Deferring it for two more years marks a significant loosening of the country’s budget rule.

The original rule was designed to keep deficits small and predictable. Pushing compliance to 2028 means two more years, 2026 and 2027, will pass with deficits well above the cap before the rule binds again.

Prensa Mercosur framed the situation on 25 August 2026, citing economist Wildo González. His reading describes a Paraguay fiscal crossroads in which the timing of the correction matters as much as its size.

Revenue Falls Short of Forecast

Tax revenue grew just 2.4% in the first half of 2026. The official forecast had projected growth of 8.5% for the period.

That shortfall complicates the consolidation path. Slower revenue growth means the deficit must be closed more through spending restraint than through rising income.

The state has also accumulated arrears to pharmaceutical and construction firms above US$1 billion. Those unpaid bills represent hidden pressure on future budgets.

Public debt stood at US$21.947 billion at the end of the first half of 2026. Servicing that debt adds a fixed cost that narrows room for maneuver.

The combination of weak revenue, supplier arrears and a rising debt stock defines the fiscal starting position. Each element limits the options available for the correction ahead.

The Cost of a One-Year Adjustment

Correcting the deficit from 3.9% to 1.5% of GDP in a single year implies an adjustment of 2.4 percentage points. That is equivalent to roughly US$1.5 billion.

With fiscal multipliers estimated between 0.7 and 1.2, such a cut could reduce 2028 growth by 1.5 to 2.5 percentage points. The economy would feel the contraction across consumption and investment.

A gradual correction starting earlier would spread that cost over several years. Each step would be smaller, and the cumulative drag on growth would be easier to absorb.

That trade-off sits at the heart of the Paraguay fiscal crossroads: pay a moderate price over time, or a heavy price all at once.

González’s analysis, as presented by Prensa Mercosur, stresses that postponing the adjustment does not eliminate it. The arithmetic of 2.4 percentage points of GDP remains on the table regardless of when the correction begins.

Options on the Table

One named option is a comprehensive tax reform. The agenda would broaden the tax base, review exemptions and strengthen tax administration.

Paraguay’s tax burden stands at roughly 14% of GDP, low by regional standards. Each additional point of tax pressure is equivalent to about US$600 million.

Another recommendation is to protect public investment, currently between 1.5% and 2.5% of GDP. Cutting capital spending would deliver savings today at the cost of growth tomorrow.

A third path would add escape clauses or a cyclical rule to the Fiscal Responsibility Law. Such mechanisms would let the deficit breathe in bad years without abandoning the anchor.

None of these options excludes the others. A gradual correction could run alongside tax reform, protected investment and a redesigned fiscal rule, combining revenue, spending and institutional fixes.

Markets Still Open for Asunción

Despite the fiscal slippage, Paraguay retains access to international capital markets. The sovereign reopened its 2055 bond at a yield of 6%.

That continued access gives the government room to choose a gradual path. Financing remains available while credibility holds.

But the revenue underperformance and the stock of arrears narrow the margin for delay. Each year of drift adds to the eventual adjustment bill.

Market access at 6% is a resource, not a guarantee. Sustained investor confidence depends on a credible path back to the 1.5% cap.

The path chosen in the coming months will determine whether the Paraguay fiscal crossroads ends in orderly consolidation or in an abrupt 2028 shock.

Frequently Asked Questions

Sources

• prensamercosur.org
• perspectivas.com.py

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