Caribbean: IDB Predicts Post COVID Economies Will Grow

A report by the Inter-American Development Bank has predicted GDP will rise by 4.1% this year and will return to 2.5% growth each year from 2022 after falling by 7.4% in 2020 – the worst single-year decline since 1821.

To invigorate the region’s economies, when they are suffering from high unemployment and stretched public services, governments need stronger public finances, the report said.

Latin America and the Caribbean has a narrow but clear path to emerge stronger from the pandemic and social shocks of recent years,” said Eric Parrado, IDB chief economist.

“Healthy fiscal systems can help us unlock our potential, by leveraging the reallocation of resources across sectors to drive productivity growth, promote formal employment and achieve a greener future that defies the false dichotomy of economic growth and environmental sustainability.”

Governments in the region provided $485bn in fiscal support during the pandemic, with packages averaging 8.5% of GDP, but this average was propped up by a few large economies.

More than a third of Latin American and Caribbean countries provided support of 3% of GDP or less, which the IDB said reflected their lack of fiscal space, when the region’s advanced economies spent 19% on average.

High spending and low revenues drove the region’s overall fiscal deficit to 8.3% of GDP, up from 3% in 2019, and public debt rose from 58% of GDP to 72%.

The IDB has predicted debt will rise to 76% of GDP by 2023, but a stronger-than-expected recovery coupled with reforms could stabilise it at 72%, before it would begin to fall.

These reforms should include better targeting of social transfer programmes, matching public sector wages with private sector ones and improving procurement, the report said, in moves the IDB claimed would save more than 4% of GDP.

The bank also urged countries in the region with small tax bases to increase their revenues to spend on infrastructure and the digital economy, because these areas are likely to encourage further economic growth.