Paraguay IMF Review: Growth Holds at 4.4% as Deficit Widens to Clear Old Bills
PARAGUAY · ECONOMY
Key Facts
—The verdict: The IMF Executive Board concluded Paraguay’s 2026 Article IV consultation on 28 August, projecting 4.4 percent growth this year after 6.6 percent in 2025.
—The deficit: The fiscal gap will widen from 2 percent of GDP in 2025 to 3.5 percent in 2026 — mainly to clear payment arrears from 2023–2025 and because the strong guaraní is denting customs revenue.
—The anchor: Directors welcomed the government’s commitment to restore compliance with the Fiscal Responsibility Law’s 1.5 percent deficit ceiling by 2028.
—The market: Paraguay’s country risk broke below 100 basis points in late June — 99 points, a historic low and among the lowest in Latin America.
—The jobs: Construction employed 279,215 people in the first half of 2026, up from 256,895 in 2025, with female participation nearly tripling to 13,571.
The IMF has signed off on Paraguay’s economy with one explicit condition: the wider deficit must be a bridge back to fiscal discipline by 2028, not a new habit — and construction shows why the government wants the room.
The Paraguay IMF Review Delivers a Rare Clean Bill
The Paraguay IMF review concluded on 28 August reads like a showcase for the region. The Fund’s Executive Board, closing the 2026 Article IV consultation, noted that the economy expanded 6.6 percent in 2025 and grew 5.8 percent year-on-year in the first quarter of 2026, driven by services, manufacturing, agriculture, construction and energy distribution. Growth should reach 4.4 percent this year and settle at a 3.8 percent potential rate over the medium term, with risks “balanced” — a word the IMF rarely grants so freely in South America.
The monetary picture is just as calm. Headline inflation ran at 2.1 percent year-on-year in June and is projected to land on the central bank’s 3.5 percent target this year. The guaraní appreciated 23.1 percent against the US dollar in nominal terms over twelve months — 8.6 percent in the first half of 2026 alone — helping to cheapen imported goods. Net international reserves stood at about US$11 billion at the end of June, comfortably within adequacy thresholds, and the Fund sees room for gradual interest-rate easing if the energy-price shock proves temporary.
The current account deficit narrowed to 2.5 percent of GDP in 2025 and should hold near 2.6 percent in 2026. Banks are well capitalized and liquid, with capital adequacy at 17.3 percent against a 12 percent minimum.
A Deficit That Pays Old Bills
The one number moving in the “wrong” direction is the fiscal deficit: 2 percent of GDP in 2025, heading to 3.5 percent in 2026. The IMF’s explanation matters more than the figure. Most of the widening comes from the partial clearance of expenditure arrears accumulated between 2023 and 2025 — unpaid bills to pharmaceutical suppliers and public-works contractors — and from weaker revenues as the strong guaraní shrinks the local-currency value of trade taxes. Customs revenue fell 11.5 percent through June; non-tax revenue dropped 11.3 percent.
The government’s own roadmap, presented by Economy Minister Óscar Lovera in early August, tells the same story with slightly different numbers: a deficit near 3.2 percent of GDP in 2026, 3.9 percent in 2027, and a return to the Fiscal Responsibility Law’s 1.5 percent ceiling only in 2028 — the crossroads we analyzed last week. IMF Directors explicitly welcomed that 2028 commitment, while pressing for faster tax-administration reform, spending efficiency and a definitive end to arrears through better public financial management, including real-time contract tracking.
In other words, the Fund is tolerating a wider deficit because it is the cost of honest accounting — settling hidden debts instead of rolling them over. The condition is credibility: the same fiscal rules that earned Paraguay investment grade from Moody’s in 2024 and S&P in 2025 must visibly hold.
Markets Have Already Voted
Investors needed no convincing. Paraguay’s country-risk premium, measured by JP Morgan’s EMBI index, broke below 100 basis points at the end of June to 99 points — a historic low — and stayed among the lowest in Latin America through July, local outlets InfoNegocios and La Nación reported. For a country that was shut out of investment-grade territory two years ago, the repricing translates directly into cheaper infrastructure financing.
The trade agenda is moving in parallel: as we reported on 31 August, Paraguay’s beef sector is eyeing a bigger US quota on the back of the same macro credibility the IMF has now formally endorsed.
The Construction Engine Behind the Numbers
The macro story has a very concrete floor — literally. Construction employed 279,215 people in the first half of 2026, up from 256,895 in 2025, according to industry figures reported by InfoNegocios in June. The most striking shift is who holds those jobs: women on building sites nearly tripled, from 4,814 in 2025 to 13,571 in the first half of this year, lifting female participation from 2 to 5 percent of the sector’s workforce.
José Luis Heisecke, president of the Paraguayan Chamber of the Construction Industry (Capaco), attributes the boom to record public-works execution by the Ministry of Public Works. Between 30 and 40 percent of everything a construction company bills goes straight to wages, he notes — which is why the sector is the fastest transmission belt from fiscal policy to household income. It is also why the arrears question is existential for the industry: Heisecke’s own condition for keeping the jobs is that “the government keeps betting on infrastructure and paying its bills.”
That single sentence connects the whole board: the 2026 deficit exists largely to pay contractors; the contractors employ the workers; and the workers’ incomes drive the consumption that keeps growth above 4 percent.
What to Watch
Three risks deserve attention beneath the headline calm. Consumer credit is still expanding at 22.8 percent a year even as overall credit growth slowed to 3.2 percent in May — a pocket of leverage the central bank is watching. Second, the arrears clearance must be completed and then genuinely stop; a third cycle of hidden debts would burn the credibility the IMF just praised. Third, the 2027 budget, with its projected 3.9 percent deficit, must show the pivot toward the 2028 ceiling.
For foreign investors and residents, the picture is unusually coherent: South America’s growth leader, inflation on target, a record-low risk premium, an appreciating currency and a construction sector hiring at record pace — with a fiscal detour that is only acceptable if it ends, as promised, in 2028.
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