The growth of interest payments on Paraguay's public debt is at the center of a debate over the country's fiscal space: although borrowing still stands at 36.2% of GDP, the rising debt service is squeezing the margin for investment in health, education, and infrastructure.
Humberto Colmán, chief economist at Desarrollo en Democracia and former member of the Central Bank Board, says the debt remains sustainable but warns that interest payments already account for around 2% of GDP and are tightening the budget. He draws a distinction between borrowing for "productive investment" and borrowing used for current spending, as occurred with delayed payments to suppliers that ended up being financed with debt resources — a situation that, according to him, is already reflected in the Central Administration's operating deficit.
Colmán highlights that the rise in rigid spending — wages, transfers, pensions, and interest payments themselves — is shrinking the fiscal space for investment. Regarding the structure of the debt, which is predominantly denominated in dollars, he notes that the depreciation of the US currency helps ease the burden in terms of GDP, but the country remains exposed to exchange rate fluctuations. "The underlying problem is the capacity to generate foreign currency. With the decline in revenue from binational entities, the Treasury will have less exchange rate coverage and will need to purchase foreign currency to meet debt service obligations," he warns.
Martha Coronel, an economist at the consulting firm Mentu, assesses that the level of indebtedness is not yet a problem in itself, but questions how healthy it is. "The more we borrow, the more interest grows and the more fiscal space is consumed. It is a rather unfavorable cycle, because these interest payments will take up a lot of room from genuine investments," she says. For her, Paraguay needs to invest in more roads, schools, hospitals, and human capital, taking advantage of the demographic dividend that has only a few years left.
Coronel advocates for a fiscal reform — not just a tax reform — to improve the quality of public spending. "We need to know how to use what is collected, use it intelligently, and translate that into more growth, more production, and more revenue that is reinvested. This is the virtuous cycle we should be pursuing," she concludes.
Data from the Ministry of Economy and Finance show that public debt service has grown steadily: interest payments rose from $187.3 million in 2015 to $1.0448 billion last year, an increase of 457.8%.
Raúl Luraghi, director of the Caja de Valores del Paraguay (Cavapy), argues that Paraguayan public borrowing remains at manageable levels and below those of other emerging economies. However, he agrees that the main challenge is not the volume of the debt, but its management and execution. "A well-managed and well-executed debt can be positive, as it makes it possible to finance infrastructure and projects that drive growth and generate resources to repay the interest," he says.
Past governments, as well as the current government, have worked toward the goal of raising Paraguay’s public debt to around 35% of GDP, as this ratio is considered “healthy.”
The author of these lines, however, believes that debt should not reasonably be measured against a country’s economic output, meaning GDP, but rather against government income or the government surplus. This is especially true in a country like Paraguay, where an increase in GDP does not necessarily translate into higher government revenue, since many types of income are tax-exempt.