IDB bearish on regional economic prospects
The Inter-American Development Bank, IDB, says Latin America and the Caribbean countries, known as the LAC region, need to rise to the challenge to lower inflation and reduce the public debt burden in 2023.
In its annual macroeconomic report released during the annual Board of Governors meeting in Panama, the IDB said it is also critical for LAC to address the triple challenge of growing social demands, limited fiscal resources, and low productivity and growth.
The bank projects a massive decline in economic output for the region, noting in the report titled Preparing the Macroeconomic Terrain for Renewed Growth, that the baseline scenario sees the region growing by one per cent this year, after better-than-expected growth of 3.9 per cent in 2022.
The forecast for 2024 is better at projected growth of 1.9 per cent; however, the IDB said that growth scenario 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 face depressed global demand, high financing costs and 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.”
On the monetary front, the IDB said countries will need to maintain or tighten their policy stance to ensure inflation returns to target ranges by 2024.
The median annual inflation rate in Latin America and the Caribbean reached 9.6 per cent 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 policy actions to contain inflation are expected to impact levels of growth in 2023. As such, the report recommends short-term policies to reduce 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 labour markets by reducing incentives for informality and promote productivity, are expected to pave the return to healthier growth levels.
The report also points to the need for fiscal focus on expenditures and tax collection, on the expectation that governments will need to manage debt levels that could rise amid the uncertainty.
On average, public debt in the region fell to 64 per cent of GDP in 2022 after rising sharply during the pandemic. IDB studies recommend that governments in the region reduce public debt ratios to a prudent range of 46-55 per cent of GDP.
The IDB recommends that countries take advantage of long-term financing from multilateral development banks to improve their debt composition, saying exchanging expensive short-term debt for long-term debt at lower costs would benefit many of the LAC economies.
CMC