Solid growth ahead amid firm domestic demand
Economic growth in 2025 remains broadly in line with 2024’s firmness as agricultural and hydroelectric output stabilises at a fair level, following a period of significant volatility. The 1Q25 GDP result was seen as positive, driven by robust performances in industry and services, as well as strong domestic demand, reinforcing expectations of a favorable outlook. Although export revenues may remain subdued amid weak global commodity prices, net exports are likely to contribute positively, supported by lower import prices, better river conditions for the transport of agricultural exports and the generation of hydroelectricity sold to Brazil. However, agricultural revenues could face renewed headwinds from softer international prices and the potential return of La Niña in the second half of 2025, while uncertainty around global trade policy and rising protectionist measures may weaken specific export segments such as beef and manufactured goods.
Household consumption (66% of GDP in 2023) is expected to remain resilient, buoyed by a stable labor market, real wage growth, and lower inflation. Gross fixed investment (19% of GDP) should also stay strong, supported by expanding credit and tax incentives under the so-called Law?60/90. Meanwhile, public spending (12% of GDP) will play a more nuanced role: while capital outlays on infrastructure will sustain growth momentum, the government's commitment to gradual fiscal consolidation may restrain the expansion of current expenditures. Monetary policy is expected to remain on hold, with the central bank maintaining its 6.0?% policy rate (June 2025) to balance supportive financial conditions with lingering food-price inflation.
In 2026, the economy is expected to maintain its expansionary trajectory, with growth gaining momentum. Export performance should improve, driven by a partial recovery in global agricultural prices and firmer external demand. On the domestic front, investment and consumption are likely to sustain their positive trends, albeit restricted by tighter fiscal conditions. The consolidation of macroeconomic stability—reflected in stronger fiscal indicators, anchored inflation expectations, and continuity in policy direction—should reinforce investor confidence and contain volatility.
External imbalance narrows gradually after 2024 deterioration
After deteriorating sharply in 2024, when the current account shifted to a deficit of around 3% of GDP due to falling soybean prices and critically low water levels that hampered hydroelectric exports, Paraguay’s external position modestly improves in 2025. Although the deficit will remain historically high, a narrowing trend should begin to take shape, driven in large part by the recovery of electricity exports as river conditions normalize. Goods exports are also expected to increase in volume, particularly agricultural products, even as global prices remain subdued. Imports will likely rise as well, led by strong demand for capital goods tied to infrastructure and private investment, although lower commodity prices should help contain the overall import bill. On the services side, revenues from regional tourism and river transport are expected to continue recovering, providing a partial offset to the deficit. Moreover, the primary income account is projected to remain in deficit as foreign-owned companies operating in Paraguay continue to repatriate a significant portion of their profits abroad. Foreign direct investment (FDI), supported by large-scale projects such as Paracel (pulp) and Atome (green hydrogen), should finance a significant share of the external gap, helping to reduce reliance on external borrowing. Despite lingering vulnerabilities, the external position is expected to become more sustainable, underpinned by solid financial inflows and prudent monetary policy. As at April 2025, international reserves covered approximately six months of imports.
In 2026, the current account deficit is expected to narrow further as export performance strengthens and import growth slows. Further recovery in agricultural yields and energy production, combined with a partial rebound in global commodity prices, should support a firmer export outlook. Simultaneously, as major investment projects reach maturity, demand for capital goods is likely to moderate, thereby reducing import pressures. The resilience of services exports and remittance inflows from Paraguayan expatriates, along with stable financial account dynamics, should further support the adjustment of the external balance.
On the budgetary front, the fiscal deficit is expected to narrow further in 2025 as the government re-anchors expenditure to revenue growth and reinforces spending controls. Election-related outlays and arrears repayments have given way to tighter budget discipline, while tax receipts are benefiting further from the expanded electronic invoicing system and steady improvements in collection capacity. Current spending is projected to grow in line with core priorities, and infrastructure outlays are being maintained through selective public-private partnerships, which preserves key investments without risking headline stability. The public debt stock remains sustainable under prevailing financing conditions and a relatively diversified creditor base. As of late 2024, roughly 62% of total public debt was external. The vast majority was denominated in US dollars, although this composition has begun to shift with the successful issuance of a USD 600 million bond in guaraní in February 2025. A concomitant dollar-denominated issue further underscored Paraguay’s continued access to diverse sources of external financing. International private bondholders and multilateral institutions each account for around 28% of the total debt, while domestic financing is gradually gaining relevance through active liability management. In 2026, the deficit is expected to narrow further as the impact of extraordinary expenditures fades and revenue performance continues to improve in tandem with economic activity. With restrained nominal spending growth and a renewed commitment to fiscal rules, the deficit is projected to converge towards its legal ceiling of 1.5% of GDP, as defined by the Fiscal Responsibility Law, thereby reinforcing investor confidence and supporting broader macroeconomic resilience.
President Peña’s struggle with reform and party divisions
Elected with 42.7% of the vote and in office since August 2023, President Santiago Peña of the conservative Partido Colorado (PC) continues to face mounting political and institutional challenges. Despite campaign promises to combat crime and corruption, limited progress in these areas has fuelled discontent and tested public confidence. While the anti-smuggling plan implemented in late 2023 yielded some results, especially along the Argentine border, enforcement remains weak elsewhere. Corruption remains a central concern in the political agenda, with efforts to improve governance coming up against structural barriers such as Paraguay’s weak institutional framework and limited judicial independence. Moreover, Peña’s push to boost investor confidence remains hindered by the country’s poor business climate.
The government’s attempt to advance its reformist agenda, including politically sensitive initiatives such as pension reform, has generated friction within the president’s own party. Proposals to increase contributions from privileged public sector categories have faced resistance from conservative factions, which remain influential within the Colorado Party. These tensions, combined with the continued presence and influence of former president Horacio Cartes, have deepened intra-party divisions and contributed to the legislative gridlock. Although the Honor Colorado faction, to which President Peña belongs, has expanded its presence in Congress, it lacks the clout to ensure the smooth passage of reforms. As a result, the slow pace of structural change has eroded part of Peña’s political capital and has limited his ability to consolidate support and implement campaign priorities. In the near term, social dissatisfaction and institutional fragmentation are likely to continue chipping away at the administration’s approval rating and legislative effectiveness.
Regarding foreign trade, Paraguay is a member of Mercosur, a regional trade bloc that has struggled in recent years to advance both internal integration and external agreements. While the bloc’s rules prevent members from negotiating separate trade deals, the Peña administration has adopted a pragmatic posture, supporting Mercosur’s collective negotiation strategy while advocating for a more agile and responsive agenda. In this context, Paraguay welcomed the closure of negotiations for the Mercosur-European Union agreement in December 2024, which came after years of delays largely driven by environmental concerns raised by European partners. The updated text includes commitments related to the Paris Agreement on climate, provisions on deforestation monitoring, and revised rules on public procurement, automobiles and critical minerals. Despite this progress, the agreement still requires ratification in both regions and is likely to face political hurdles in some European countries. Within Mercosur, Paraguay has been a vocal supporter of strengthening institutional mechanisms that ensure fairer internal coordination and concrete benefits for smaller economies. A central issue in this regard has been the renegotiation of the Itaipu Dam agreement with Brazil, whose financial clauses expired in 2023. Paraguay seeks to obtain better compensation for the energy it does not consume and is obliged to sell to Brazil, including the right to sell its surplus to third countries. Looking ahead, the government is expected to continue pressing for a more balanced and forward-looking Mercosur, with emphasis on trade diversification, energy cooperation and greater regional integration capable of supporting long-term development goals.