Paraguay Faces Fiscal Crossroads as Deficit Cap Slips to 2028

Paraguay faces a critical fiscal decision as its deficit cap approaches in 2028. The Paraguayan government must choose between a gradual adjustment or a sharp cut in 2028 to meet the 1.5% Fiscal Responsibility Law cap. According to projections from the Ministry of Economy and Finance, the deficit is expected to be 3.2% of GDP in 2026 and 3.9% in 2027, before returning to the 1.5% cap in 2028.

The postponement of the 1.5% target, announced on 7 August 2026, means that Paraguay will have to manage deficits well above the cap for two more years. This means that the country will be facing a deficit of 2.4 percentage points to be corrected, which could equate to around US$1.5 billion. The economic impact of such a correction could reduce growth by 1.5 to 2.5 percentage points in 2028.

Paraguay’s tax revenue has fallen short of expectations, contributing to the fiscal shortfall. Analysts suggest that a comprehensive tax reform could help broaden the tax base and strengthen tax administration. Protecting public investment and including escape clauses or a cyclical rule in the Fiscal Responsibility Law are also options on the table. However, these measures must be combined with other revenue and spending measures to ensure a credible path towards meeting the deficit target.

Despite the challenges, Paraguay still has access to international capital markets. The sovereign has reopened its 2055 bond at a yield of 6%, allowing the government to choose a gradual path. Nevertheless, the country must ensure a credible path to meet the 1.5% deficit cap to maintain investor confidence. The decision made in the coming months will determine whether Paraguay's fiscal crossroads ends in orderly consolidation or in an abrupt 2028 shock.