Fiscal, institutional reforms key to Latin America and Caribbean postpandemic recovery — IDB study

COUNTRIES in Latin America and the Caribbean urgently need fiscal reforms to set the stage for a more robust and sustainable POST-COVID-19 recovery, the Inter-american Development Bank’s (IDB) annual Macroeconomic Report says.

The study, ‘Opportunities for Stronger and Sustainable Post-pandemic Growth’, indicated that to grow more vigorously, the region should enact a series of reforms to improve productivity, help connect firms to global value chains, embrace the digital economy and promote job creation in an inclusive, sustainable, and resilient way.

In addition, the IDB study suggested that governments should take advantage of low international interest rates to cut interest payments, with international financial institutions providing more financing to lower payments or replace more expensive debt.

“Latin America and the Caribbean has a narrow but clear path to emerge stronger from the pandemic and social shocks of recent years,” said Eric Parrado, IDB’S chief economist.

“Healthy fiscal systems can help us unlock our potential by leveraging the reallocation of resources across sectors to drive productivity growth, promote formal employment, and achieve a greener future that defies the false dichotomy of economic growth and environmental sustainability”.

According to IDB, governments provided US$485 billion in fiscal support during the pandemic, with packages averaging 8.5 per cent of gross domestic product (GDP), but this is pushed upwards by a few countries with big packages, while more than one-third of countries provided more modest support of three per cent of GDP or less, reflecting available fiscal space. In contrast, fiscal packages in advanced economies averaged 19 per cent of GDP.

The negative impacts on revenues and more spending drove the average primary balance from –0.5 per cent of GDP in 2019 to –5.4 per cent in 2020. Overall fiscal deficit increased to 8.3 per cent of GDP from 3.0 per cent in 2019. Public debt rose from 58 per cent in 2019 to 72 per cent of GDP in 2020. The report forecasts that it will rise to 76 per cent by 2023.

Furthermore, a strong recovery coupled with reforms would stabilise debt at 72 per cent and which then could begin to fall, the report noted. This would result in countries with high tax takes and high spending benefiting significantly from greater efficiency in both taxation and spending.

“Government revenues could save a more than four per cent of gross domestic product [GDP] by better targeting of social transfer programmes, matching public wages with private sector ones, and improving government procurement, among other actions,” IDB stated.

“Countries with low tax takes should focus on increasing revenues without sacrificing growth. Higher revenues and savings should be spent on well-considered projects with high social and growth benefits, particularly in infrastructure needed to construct a digital economy that provides more job opportunities for the economy of the future”.