PANAMA CITY, Panama, CMC – The Inter-American Development Bank (IDB) says Latin America and the Caribbean (LAC) countries need to rise to the challenge to lower inflation and reduce the public debt burden in 2023.
In its annual Macroeconomic Report released here that coincided with the annual Board of Governors meeting that ended here on Sunday, the Washington-based financial institution said it is also critical for the LAC to address the triple challenge of growing social demands, limited fiscal resources, and low productivity and growth.
According to the Report titled “Preparing the Macroeconomic Terrain for Renewed Growth, ” the baseline scenario sees the region growing by one percent this year after better-than-expected growth of 3.9 percent in 2022.
It said the growth scenario that reaches 1.9 percent in 2024 assumes the United States will avoid a recession in 2023 and that there will be a downward global trend in inflation.
The Russian invasion of Ukraine in 2022 sent shock waves across the world. Commodity prices soared, growth expectations plummeted, central banks increased interest rates to tame inflation, and there are continued sources of economic and financial uncertainty. As a result, in 2023, Latin American and Caribbean countries will face depressed global demand, high financing costs, and recent financial uncertainty.
“As the world adjusts to the consequences of overlapping shocks, many risks have appeared on the economic horizon for Latin America and the Caribbean,” said IDB chief economist Eric Parrado.
“Policymakers need to navigate these waters carefully by coordinating the right mix of monetary, fiscal, financial, and other relevant economic measures to return to a path of sustained economic growth.”
The IDB said countries must maintain or tighten their policy stance on the monetary front to ensure inflation returns to its targets by 2024.
The median annual inflation rate in Latin America and the Caribbean reached 9.6 percent in July 2022, the highest since the global financial crisis in 2008. In most countries, inflation has fallen after that peak but remains high throughout the region. The Report notes dependence on central banks is crucial and a priority for controlling inflation.
Reducing inflation will contribute to the expected economic slowdown in 2023. The Report recommends short-term policies to minimize the impact on the most vulnerable, including implementing targeted subsidies. In the medium and long term, policies that stimulate investment in physical and digital infrastructure, improve the functioning of labor markets by reducing incentives for informality and promote productivity will contribute to a return to healthy growth levels.
The publication also recommends fiscal policy plans to increase the efficiency of expenditure and tax collection, improve budgetary institutions, and adequately manage debt.
The report scenarios suggest that sovereign debt could grow, signaling the need for policies to adjust fiscal accounts.
On average, public debt in the region fell to 64 percent of gross domestic product (GDP) in 2022 after rising sharply during the pandemic. IDB studies recommend that governments in the area reduce public debt ratios to a prudent range of 46-55 percent of GDP.
The Report recommends that countries use long-term financing from multilateral development banks to improve their debt composition. Exchanging expensive short-term debt for long-term debt at lower costs would benefit many.
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