WASHINGTON, CMC – The International Monetary Fund (IMF) says Latin America and the Caribbean (LAC) region has shown “quite a bit of resilience” and that the rebound from the coronavirus (COVID-19) pandemic has been stronger than previously expected.
“We see resilience partly as a result of countries’ progress in strengthening their macroeconomic frameworks. With most economies now operating near potential, however, activity in the region has been generally moderating in recent quarters,” Rodrigo Valdes, the director of the IMF’s Western Hemisphere Department, told reporters at the bank’s annual Regional Economic Outlook Press Briefing for the Western Hemisphere.
On the positive side, labor markets have remained pretty resilient, with unemployment still at historically low levels almost everywhere.
“With an external environment that, at least on the trade side, is weakening and the effect of monetary policy tightening to bring down inflation in the region and those effects still materializing.
“We expect growth in Latin America and the Caribbean to moderate further this year, slowing from the 2.3 percent the region grew in 2023 to two percent this year. We see risk around this baseline projection as broadly balanced. This is not, as we saw this in the past; this is good news, and this reflects more balanced global risks,” Valdes told reporters.
He said the region’s medium-term growth is projected to average about two percent in the next few years, well below the growth rate of peer economies in the other areas.
Valdes said that about Haiti, the Washington-based financial institution has been engaged “very closely with Haiti in the last few quarters.
“We have a staff monitoring program there. But at this point, the priority is to restore security. This is a precondition for macroeconomic stability and growth to materialize.
“We are projecting three percent negative growth this year. And we’re closely monitoring the economic situation, including through big data.
“We have a lab in the Fund with that, and we’re also monitoring political developments, including the next steps of the newly foreign presidential council. But we will continue to engage during this difficult time within the mandate that the fundamental has,” Valdes told reporters.
He said that, regarding the Twin Island Federation of St. Kitts-Nevis, the country has “been growing very well.
“We expect the economy to grow by three percent on average in the medium run. Three percent, the medium run is higher than the average of the region,” he said, adding, “We think that it’s essential to continue advancing in the transition to renewable energy, to increase capital expenditure in water, infrastructure, and climate adaptation, also to target current spending better.
“We have emphasized tax reform and revenue mobilization to reduce reliance on citizenship by investment (CBI), a welcome income source. But we cannot bet it will always be there,” Valdes said.
Under the CBI program, St. Kitts-Nevis offers citizenship to foreign investors in return for a substantial investment in the Federation’s socio-economic development.
Valdes told reporters that the Caribbean region has done “pretty well in the last few years,” noting that “if you would have put the shocks that were coming five years ago in the future, I would have been apprehensive.
“The reality is that the economy has recovered. The Caribbean region went back to activity levels pre-COVID. Some countries are growing faster than others, particularly to notice very strong growth. But there are others, too.”
He said that the group of more tourism-dependent countries rebounded very quickly and are normalizing.
“The following message is valid for all region countries: We’re returning to average growth. If we want more growth, we need to work through the underpinnings of long-term growth with reforms of different types. And that’s critical as a message for the Caribbean, too.
“By the way, on the Caribbean, where I didn’t mention the issue of access, there are no plans to change our definitions of which country is either, which does not have concessional lending, etc.
“Those are rules that are given. However, we understand that there is an interesting discussion about other vulnerability measures. Now, there has yet to be a consensus on that. So, is discussion ongoing.”
Valdes said that the IMF is “pretty flexible when we design programs.
“When we design programs, we take into account vulnerability. And part of our advice to the region, to the Caribbean region, is that, given the effect of natural disasters that happen there, regarding how often and how big, it’s essential to have fiscal space to tackle that in preparation.
“So this recommendation of fiscal restraint in the short run, to build up space and buffers, also applies squarely to the Caribbean,” Valdes told reporters.
The IMF senior official said that while inflation is receding throughout the region, “we project that it will continue falling during this year, thanks to swift actions of the region’s central banks and also, of course, the global disinflation trend that reflects monetary policy elsewhere and also that the supply-side shocks are normalizing.”
He said risks to inflation have also become more balanced than in the past.
“With inflationary pressures subsiding since 2023, the region’s central banks have started to reduce rates, although policy rates remain in contractionary territory. Our view is that more policy easing should continue. However, it will be essential to carefully calibrate the pace of easing to strike a balance between durably bringing inflation back to target in the final stretch and avoiding an undue economic contraction.”
On the other hand, with public debt at high levels, the IMF believes that fiscal policy should focus decisively on rebuilding policy space.
“This message is not very different from the one we have for many regions in the world, but it applies especially to our region.
“As we highlighted in the past, most countries in the region have withdrawn the pandemic-related fiscal stimulus and have ambitious plans to strengthen their policy finances. However, we have high debt from before the pandemic.
“When commodity prices declined, countries took some time to adjust, and before the pandemic, we already had high debt. Today, we see that risks of slippages are increasing as consolidation plans are postponed.”
Valdes said faster consolidation is needed to put public debt on a firmer footing.
“Timely fiscal tightening will also allow for faster normalization of the monetary policy mix. For macro, you need to think of both together for the policy mix. Moreover, to be durable, a fiscal adjustment must include revenue mobilization to protect key social spending.”
Valdes said maintaining social cohesion should be a centerpiece of a fiscal consolidation plan, given the region’s high levels of poverty and inequality.
“However, fiscal consolidation is not the only urgent task. It’s important to macroeconomic stability. However, we also need to grow for social challenges, and this is my third message. It’s urgent to take action to raise potential output growth,” Valdes told reporters.
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