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In the best-case scenario, the Latin American economy will grow by 4.1% this year, recouping just over half of the 7.4% drop in gross domestic product (GDP) seen last year due to pandemic, according to the annual macroeconomic report of the Inter-American Development Bank (IDB) released Saturday. But there is a much more pessimistic scenario. If the countries of the region do not take charge of their finances and adopt the necessary fiscal and economic reforms, the recovery will be only 0.8%.
“To achieve a higher growth rate, the region needs to implement a series of reforms that improve productivity, help connect businesses to global value chains, and foster the digital economy and inclusive job creation. , sustainable and resilient, ”declares the statement accompanying the report signed by its expert economists Eduardo Cavallo and Andrew Powell. Their estimates also predict that economic expansion will slow down and grow only 2.5% in 2022.
One of the main issues that the IDB identifies as a common thread between countries is the increase in their debt. The region’s overall budget deficit fell to 8.3% of GDP last year from 3% in 2019. Public debt was equivalent to 58% of GDP in 2019 and reached 72% last year. The IDB predicts that it will continue to increase, reaching 76% in 2023.
“Given the fiscal challenges and high levels of indebtedness, improving fiscal institutions should be a high priority issue,” said Powell, senior advisor to the IDB and co-coordinator of the report. “Stronger institutions would give a greater degree of credibility and allow a more gradual adjustment with lower interest rates to ensure debt sustainability,” Powell said in the statement.
Governments spent $ 485 billion in tax support during the pandemic, but most of those resources went to a few countries like Brazil and Chile, where economic stimulus packages were important. Two-thirds of countries spent an average of 3% of GDP, while in advanced economies it averaged 19%.
As of February this year, 15 million of the 26 million jobs lost at the height of the pandemic were still missing in 12 countries in the region. “Because of that shock, projections indicate that extreme poverty will drop from 12.1 percent to 14.6 percent, while moderate poverty will drop from 11.7 percent to 14.6 percent, ”the IDB reported.
“While the economic recovery from COVID-19 may already be underway, previous crises have shown that the pace of recovery can be erratic and progress more slowly in high productivity sectors,” said Cavallo, senior economist at the BID during the press release. “An increase in productivity through innovation and offshoring, as well as efficient investments in quality infrastructure with strong spillover effects on other economic sectors, will help the region to take advantage of the opportunities to achieve more vigorous sustainable development in the post-pandemic phase. ” He added .
The report predicts that “in the coming months, central banks will have to navigate dangerous and unknown waters” because, with interest rates already low, banks have fewer weapons. “Policymakers must respect and maintain the independence of central banks, which in turn must resist the temptation to take on private credit risk, or provide monetary financing to the budget deficit on a prolonged basis. . History suggests this will lead to greater economic uncertainty and high inflation, which are costly to reverse later ”.
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