WASHINGTON, United States, Thursday April 19, 2018 – The economies of Latin America and the Caribbean (LAC) have turned the corner after a year of tepid growth and six of stagnation, providing an opportunity for countries to solidify their fiscal positions and lay the foundation for long-term inclusive growth, the World Bank says.
In its latest semi-annual report, ‘Fiscal Adjustment in Latin America and the Caribbean: Short-Run Pain, Long-Run Gain?’, the World Bank’s Chief Economist for Latin America and the Caribbean, Carlos Vegh, examines the quickening of growth in the region due in large part to a positive external environment including rising commodity prices, growth in the U.S. and China, and high international liquidity. However, many countries are in a fragile fiscal situation after several years of weak growth.
LAC grew by 1.1 per cent in 2017 and is expected to grow by 1.8 per cent in 2018 and 2.3 per cent in 2019, according to the report. Excluding Venezuela, the estimates are for growth of 2.6 per cent in 2018 and 2.8 per cent in 2019.
The return to growth is being led by the large South American economies of Brazil and Argentina, while the Caribbean will likely grow 3.5 per cent in 2018 and 3.4 per cent in 2019.
Despite these positive signs, 31 out of the 32 LAC countries ran an overall fiscal deficit in 2017 and public debt for the whole region stands at 57.6 per cent of GDP.
“Persistent deficits and high levels of debt can jeopardize the hard-won gains made over the last decades in lowering inflation, reducing poverty and inequality, and fuelling inclusive growth,” said Vegh. “In the long run, lower fiscal deficits – and lower public debt burdens – would help consolidate those gains and increase growth.”
Fiscal adjustments during good times are important to build fiscal space, the report finds. This enables countercyclical fiscal policies to prepare for the next time economic headwinds come along and to protect the most vulnerable. It also frees resources to deal with potential risks stemming from natural disasters like hurricanes and earthquakes.
Several countries have started gradual fiscal adjustments and the World Bank says now is the time to speed up the pace of fiscal and structural reforms, and strengthens or implement fiscal rules as needed.
However, it added, these fiscal adjustments should be gradual and not rely too heavily on cutting public investment or social transfers, which are vital to economic growth and poverty reduction.
According to the report, infrastructure investment is particularly important. Inefficient and non-productive government spending should be the focus of reform.
The challenge is finding the sweet spot for just how much fiscal adjustment is needed, according to the report. It said one crucial issue to consider in deciding on an appropriate amount public debt reduction and other fiscal reforms is the levels needed to achieve an investment grade.
“Steps in this direction can lead to huge savings on external debt and free up resources to support poverty reduction and inclusive growth,” it added.