IDB Calls For Urgent Reform In The Caribbean

NASSAU, Bahamas, Apr. 11, (CMC) – The Inter-American Development Bank (IDB) says weak global growth, a fading demographic boom, lower commodity prices and deteriorating fiscal positions are underscoring the urgent need for major reformulations in fiscal policies of Latin America and the Caribbean.

The IDB, which released its annual macroeconomic report here on Sunday, coinciding with the end of its annual Board of Governors meeting, noted that most countries need to trim fiscal spending.

However, the report argues against cutting capital investments, but rather, undertake more fundamental reforms.

IDB Vice President, Santiago Levy, said, “fiscal adjustments are never easy.

“Many countries are in the difficult position of having to act now or face more painful adjustments later on. The good news is that there is room to increase spending efficiency and rebalance fiscal policy to improve growth and protect the many social gains that have been achieved over the past decade.”

Titled “Time to Act: Latin America and the Caribbean Facing Strong Challenges,” the report notes that commodity prices have returned to their levels of the 1990s and are unlikely to bounce back anytime soon.

The IDB said that the region will experience flat to slightly negative growth in 2016.

But IDB Chief Economist, Jose Juan Ruiz, notes that “the reality is heterogeneous. While the region, as a whole, faces negative growth this year, almost a quarter of the IDB’s 26 borrowing countries are registering growth of 3.5 per cent or higher.”

Besides lower commodity prices, Latin America and the Caribbean region faces a demographic shock, too. An ageing population and other demographic trends mean that in 2011-2020 the increase in the employment share may only contribute 0.6% to growth rather than two per cent in the 2000s – a potential loss of 1.4 per cent, the IDB said.

It said the upshot is that in the post-commodity boom period of 2014-2020, average annual growth is expected to be 1.7 per cent, far below the four per cent registered during the exceptional commodity boom of 2003-2013.

“Most forecasts predict only moderate increases for commodity prices” said Andrew Powell, IDB’s Principal Economic Advisor and the lead author of the report, “but we should note that commodity prices are virtually impossible to predict. Countries need to find better ways to manage commodity price uncertainty”.

There are additional downside risks. According to IDB calculations, for every one per cent in slower growth in China reduces growth in Latin America and the Caribbean by 0.6 per cent. Every one per cent reduction in the growth of the US economy trims additional 1.5 per cent off growth in Latin America and the Caribbean.

“Adding China and the US shocks together will delay the region’s recovery by one year,” said Ruiz.

The IDB said some countries saved and can now smooth the transition to lower-commodity prices. However, several countries increased fiscal spending in response to the 2009 recession and then failed to reverse the increases as the recession receded.

Central America and the Caribbean countries are benefitting from lower oil prices and the US economic recovery but several countries still require fiscal adjustment to keep debt from rising.

The report analyses announced fiscal budgets of 15 countries. Revenue is expected to increase 1.1 per cent while cuts amounted to 1.7 per cent, of which one percentage point comes from reductions in capital expenditures, which will impact future growth.

There is an opportunity to rebalance spending in favour of public investment such as maintenance and infrastructure repair programmes. Developing nations should invest at least five per cent of gross domestic product (GDP) in infrastructure to boost growth. Over 2008-2013, the average for 16 countries in the region is 3.7 per cent of GDP.

The report noted that better infrastructure will also help improve the region’s export performance, something that can be further helped by deepening regional integration to increase scale and allow firms to compete in global markets.

The report details fiscal reforms in four countries – Jamaica, Honduras, Mexico and Chile – that promote sustainability over the longer term.

The report also recommends trimming current spending by better targeting subsidies on gasoline, electricity and public transportation, which tend to leak to higher-income households. Targeting in conditional cash transfer programs can also be improved. Low international oil prices are an opportunity to levy more taxes on gasoline.

There is also considerable space to improve efficiency, particularly in education and health, which tend to account for a large proportion of expenditure. The IDB said it will issue a flagship report in June on the importance of savings to boost future growth.