Inter-American Development Bank predicts regional comeback but acknowledges reform needed

By Aaron Humes: After a COVID-19-induced swoon of 7.4 percent last year, the worst in two centuries, the Inter-American Development Bank’s new report suggests a comeback. How much of a comeback, it says, depends on the urgent placement of fiscal reforms to set the stage for a more robust and sustainable post-Covid recovery.

The IDB’s forecast suggests growth could be as low as 0.8 percent and as high as 5.2 percent this year, and in 2022 could range from contraction by 1.1 percent to growth of near four percent. The baseline scenario is growth by 4.1 percent this year and 2.5 percent next year, if reforms are implemented to 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.

Latin American and Caribbean countries face high unemployment, strained health systems and heavy losses for vulnerable populations further exacerbating the region’s inequalities according to the report, titled Opportunities for Stronger and Sustainable Postpandemic Growth, which was issued during the IDB’s Annual Meeting, held virtually in Barranquilla, Colombia, last week.

Governments provided $485 billion in fiscal support during the pandemic, with packages averaging 8.5 percent of 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 3 percent of GDP or less, reflecting available fiscal space. In contrast, fiscal packages in advanced economies averaged 19 percent of GDP.

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

However, a strong recovery coupled with reforms would stabilize debt at 72 percent and which then could begin to fall, the report notes. Countries with high tax takes and high spending would benefit significantly from greater efficiency in both taxation and spending.

Government revenues could save a more than 4 percent of GDP by better targeting of social transfer programs, matching public wages with private sector ones, and improving government procurement, among other actions. 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.

The report recommends governments 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.

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