Asunción, Agencia IP.- Paraguay is demonstrating a steadfast commitment to fiscal discipline, as evidenced by the latest fiscal data for 2024. According to Fitch Ratings, the country has successfully reduced its 12-month rolling fiscal deficit to 3.4% of GDP by April 2024, down from 4.1% in December 2023. This positive trend is a testament to the government’s unwavering dedication to fiscal responsibility, even in the face of challenges such as the public-sector pension system deficit.

Revenue growth has been a key driver of this fiscal improvement. In the first four months of 2024, revenues surged 17% year-over-year, buoyed by a remarkable 24% increase in tax collections. However, current expenditures also rose by 9%, with interest costs seeing the most significant hike at 27%. On the other hand, capital expenditures (capex) declined sharply by 46% year-over-year, representing 2.3% of GDP on a 12-month basis, down from 2.6% at the end of 2023.

Fitch Ratings forecasts a significant narrowing of the central government deficit, aligning with targets of 2.6% of GDP for 2024 and 1.9% for 2025. This optimistic outlook is based on anticipated reductions in capex, solid GDP growth, and the resolution of last year’s arrears, estimated at 1.1% of GDP. Fitch affirmed Paraguay’s ‘BB+/Stable rating in November 2023, highlighting the importance of the government’s ability to implement a realistic fiscal consolidation strategy to maintain fiscal policy credibility and avert negative pressures on the sovereign rating.

Since taking office in August last year, President Santiago Peña’s administration has adjusted the central government deficit target for 2023 to 4.1% to clear arrears and delayed the convergence to the 1.5%-of-GDP limit stipulated by the Fiscal Responsibility Law until 2026. This adjustment necessitates a 1.5 percentage point consolidation, net of the one-off arrears payments from last year. The November 2023 Public Finances Report indicates a significant portion of this consolidation will stem from reducing capex to 1.4% of GDP by 2026 from 2.6% in 2023. Additionally, the government aims to enhance spending efficiency, improve tax administration, and foster economic growth to achieve its fiscal goals.

A notable development is the recent agreement with Brazil regarding the renegotiation of electricity tariffs at the Itaipu Dam, which both countries share. The tariffs will increase by 15.4% for the next three years to USD19.28 per kilowatt. This adjustment is expected to generate an additional USD320 million annually, predominantly funding social spending and investments outside the central government budget.

While the increased revenue from the Itaipu Dam is expected to be neutral for fiscal consolidation, it will support critical investments in health, security, public transit, and infrastructure, as outlined by President Peña. However, this revenue boost is temporary, pending a permanent tariff agreement under Annex C of the Itaipu Treaty, anticipated by December 2024.

Addressing the deficit in the public-sector pension system (Caja Fiscal) remains a significant challenge. The government anticipates that reserves will be exhausted within three years, necessitating additional fiscal support. A national commission of experts has been proposed to recommend pension reforms. Still, these changes may face resistance and require time to impact the deficit trajectory.

Stabilizing the debt-to-GDP ratio at around 35% is a crucial fiscal target, contingent on avoiding unexpected economic shocks. The government has been gradually improving the currency composition of its debt, with increased issuance in the local market in 2023 and the launch of Paraguay’s first global local-currency-denominated bond in February 2024, equivalent to USD500 million. This has raised the local currency share of government debt to 13% from 9.8% at the end of 2023. However, it remains below the average for peers in the ‘BB’ category.

Paraguay’s concerted efforts to consolidate its fiscal position are evident. Still, sustained progress will depend on overcoming structural challenges and maintaining economic stability.

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