Paraguay

Growth will lose steam in 2026 but will remain broadly stable in 2027

GDP growth moderates in 2026, mainly due to the strong comparison base. Even so, the economycontinues to expand faster than regional peers. Household consumption (65% of GDP in 2025) remains the main driver of growth, supported by strong labour market, more accommodative monetary policy (policy rate at 5.5% in June 2026, down from 8.5% until July 2023) and strong growth in credit to individuals (up +24.7% year-on-year in March 2026). Inflation picks up somewhat along the year from very low levels at the start of 2026, partly reflecting higher international energy prices since the onset of the geopolitical tensions in the Middle East and the arrival of El Niño, which tends to affect food prices. However, average annual inflation stays close to the 2025 level and remain within sight of the central bank’s target of 3.5%, with a tolerance band of ±2 percentage points. Meanwhile, investment (20% of GDP) loses some momentum. Although domestic credit conditions are supportive and the country continues to attract foreign industrial investment due to its low tax burden, overall growth posts a minor slowdown as large industrial (such as pulp and paper) and infrastructure projects (road corridor and highway expansion) reach maturity. That said, government spending (12% of GDP) follows a similar pattern, in the wake of a relatively tighter fiscal policy stance in 2026.

By contrast, exports (33% of GDP) grow at a stronger pace, supported by a solid oilseed harvest in the 2025-2026 season—particularly soybeans, whose exports increased strongly during the first five months of 2026. The robust performance partly offsets weaker growth in key export markets (notably Brazil and Argentina) and lower electricity exports. In the latter case, Paraguay is making increasing use of its domestically produced energy: electricity exports fell by 17% year-on-year through May 2026, mainly on back of higher internal demand. Last, maquila-type exports (10% of the total) also turned in a strong performance year-to-date through May, particularly for products such as ethyl alcohol and auto parts.

Growth is expected to broadly stabilise in 2027, with household consumption, investment and exports continuing to provide solid support. However, the arrival of the El Niño phenomenon in the transition to the second half of 2026 has added uncertainty to the economic outlook. At the very least, weather forecasts suggest the event could be strong and that it should persist until the beginning of 2027 at the earliest. In Paraguay, El Niño is typically associated with higher rainfall in the Paraná River basin, which has historically supported hydroelectric generation. Agriculture also tends to benefit from improved rainfall conditions, helping to mitigate the recurrent droughts associated with La Niña episodes. Notwithstanding, the effects will depend on the intensity of the event. If particularly strong, excessive rainfall could lead to flooding along the Paraguay and Paraná rivers, disrupt river-based export logistics—especially for soybeans, which are largely transported by barge—and damage rural infrastructure.

Slow narrowing of external and fiscal deficits

In 2026, the external shortfall remains broadly stable, notwithstanding a shift in its composition. On the positive note, the trade deficit (4.1% of GDP in 2025) narrows somewhat as the strong uptick in exports (notably for soybean) outpaces the increase in imports fuelled by higher fertiliser and fuel prices. In addition, slightly weaker economic momentum reduces the margin in the primary income deficit (3.8% of GDP) through lower profits repatriated by foreign companies. Conversely, the services surplus (1.9% of GDP) narrows amid higher freight costs. Similarly, remittances from expatriate decline after a decades-long peak in 2025. Last year’s pickup can be attributed to frontloading amid concerns over tighter US migration policies and to the introduction of a 1% tax on remittance transfers from the US starting in 2026. Together these factors weigh on inflows and reduce the surplus in secondary income (currently 1.9% of GDP). That said, foreign direct investment remains robust and continues to strongly finance the external account shortfall, owing to the country’s investment grade status and low tax burden. In March 2026, international reserves covered approximately seven months of imports.

Uncertainty is high as far as 2027 is concerned. The trajectory of the current account will largely depend on developments of El Niño and geopolitical tension in the Middle East. Long-standing easing of hostilities would likely reverse some of the trends observed in 2026, leading to lower freight costs—supporting a stronger services surplus—and reduced spending on fuel and fertiliser imports, thereby improving the trade balance. On the other hand, these positive effects could evaporate if a stronger El Niño materialises, which would negatively affect the 2026-2027 harvest and, consequently, weigh on exports and the trade balance.

On the budgetary front, the fiscal deficit narrows slightly further in 2026. Paraguay successfully concluded its two-year, non-financial economic program under the IMF’s Policy Coordination Instrument (PCI) in January 2026. However, despite the budget’s aim to restore compliance with the ceiling set by the 2013 Fiscal Responsibility Law for the first time since 2018, the government oversteps the limit of 1.5% of GDP. While solid economic activity continues to support tax revenue growth, gains are limited by the narrow tax base. Moreover, a mismatch is expected between revenue expansion and rising spending on back of increased arrears clearances, including payments to public works contractors and medicine suppliers, as well as higher social expenditure. In April 2026, roughly 84% of total public debt was external (equivalent to 30% of GDP). The bulk of the debt remains denominated in US dollars (about 73% of total public debt), although the composition has begun to shift following successful issuances of guaranídenominated bonds in international markets since 2024. As a result, localcurrency debt now accounts for around 25% of the total. International private bondholders and multilateral institutions hold approximately 47% and 38% of total public debt, respectively. In 2027, the deficit is expected to narrow further, as the impact from arrears payment moderates and revenue performance continues to improve in step with economic activity. Limited nominal spending growth and a renewed commitment to fiscal rules is projected to bring the deficit towards its legal ceiling of 1.5% of GDP, thereby reinforcing investor confidence and supporting broader macroeconomic resilience.

President Peña’s struggles with reform and party divisions

President Santiago Peña of the conservative Partido Colorado (PC) began a non-renewable five-year term in August 2023. In June 2026, he was ranked the fifth most-popular president in Latin America, with a 48.3% approval rating according to the public opinion research firm CB Global Data. This relatively resilient support reflects a context of macroeconomic stability and solid growth in recent years. However, these performances contrast with limited progress on key campaign promises, namely to fight corruption. Paraguay continues to perform poorly on governance indicators: in the Corruption Perceptions Index, the country ranked 150th out of 182 countries in 2025, down from 137th out of 180 in 2022. Politically, while the PC is the undisputed ruling party, having governed the country since 1947 apart from one five-year period, and boasts strong representation in Congress – it holds 48 out of 80 seats in the lower house and 23 out of 45 in the Senate – it is far from unified. Internal divisions within the party (especially from the Honor Colorado party led by former President Cartes who still enjoys strong influence) mean that the government must often negotiate within its own ranks to be able to pass legislation, which hampers the speed and scope of reforms. Among the most recent reforms, Congress passed a public pension reform bill (“Reforma de la Caja Fiscal”) in March 2026, following prolonged negotiations and heightened political tension. The final version of the bill was significantly watered down compared to the original draft. Key measures include higher employee contributions from 16% to 19% in deficit sectors and, raised state contributions to 10%.

On the external front, Brazil and Paraguay resumed negotiations in late 2025 over the Itaipu Treaty, which defines the financial terms for electricity trading between the two countries. The agreement, originally signed in 1973 and revised in 2009, was due for a full review in 2023, but talks were suspended in 2025 following a diplomatic incident linked to an alleged espionage operation. Asunción is seeking greater flexibility, including the ability to sell its unused share of electricity to third countries at market prices—a practice that has been restricted for over five decades. In terms of trade policy, Paraguay is a member of Mercosur, and President Santiago Peña broadly supports regional integration while emphasising economic openness, pragmatism, and the modernisation of the bloc. A key development is the EU–Mercosur trade agreement, which provisionally entered into force on 1 May 2026 pending final approval by the European Parliament after its referral to the European Court of Justice in January 2026. Under the agreement, Mercosur will gradually eliminate tariffs on around 90% of imports over 15 years, while the EU will liberalise a similar share and reduce tariffs on agricultural goods within quota systems that will expand over time. The deal also addresses non-tariff barriers. Currently, Paraguay exports approximately USD 395 million to the European Union, mainly in soybeans and beef. Foreign direct investment is another central pillar of the relationship: the EU accounts for about 21% of Paraguay’s total FDI stock, equivalent to roughly USD 2.2 billion in 2024, with investments concentrated in sectors such as energy, forestry, transport, agriculture and manufacturing. Although the agreement does not include a dedicated investment chapter, it is expected to stimulate additional investment flows. Regarding relations with the US, in March 2026, Paraguay signed a defence framework agreement with Washington, known as the Status of Forces Agreement (SOFA). The treaty created a legal basis for the temporary presence of US military personnel and contractors in Paraguay—without specifying a fixed duration—allowing activities such as training, technical assistance, disaster response and humanitarian operations. It also provides that US personnel will remain under the US’ criminal jurisdiction. Paraguayan authorities have stressed that the agreement is a security instrument aimed at enhancing cooperation against transnational organised crime and terrorism, and that it prohibits the creation of permanent US military bases and does not allow any transfer of sovereignty. Last, Paraguay is the only country in South America to maintain official diplomatic relations with Taiwan, a policy it has upheld for nearly 70 years. During a visit to Taiwan in May 2026, President Peña announced that the two countries had begun plans to develop an artificial intelligence hub. While details are sketchy, the initiative purportedly aims to leverage Paraguay’s abundant and low-cost energy alongside Taiwan’s technological capabilities.

Last updated: June 2026