The IDB warns that without reforms there will be no recovery in Latin America

A man juggles on a street in São Paulo (Brazil). Fernando Bizerra Jr / EFE

In the best-case scenario, the Latin American economy will grow 4.1% this year, recovering just over half of the 7.4% drop in gross domestic product (GDP) seen last year due to the pandemic, of according to the annual Macroeconomic Report of the Inter-American Development Bank (IDB) published on Saturday.

But there is a much more pessimistic scenario.

If the countries of the region do not take control of their finances and pass the necessary fiscal and economic reforms, the recovery will be only 0.8%.

• Latin American economies will be unable to fully recover in 2021

“To achieve a higher growth rate, the region needs to implement a series of reforms that improve productivity, help connect companies to global value chains, and promote the digital economy and job creation in an inclusive, sustainable way. and resilient ”, says the statement that accompanies the report signed by its expert economists Eduardo Cavallo and Andrew Powell.

Their estimates also foresee that economic expansion will decelerate and only advance 2.5% in 2022.

One of the main issues that the IDB identifies as a common thread between the countries is the increase in their debt.

The overall region's fiscal deficit rose to 8.3% of GDP last year, from 3% seen in 2019. Public debt was equivalent to 58% of GDP in 2019 and reached 72% last year.

The IDB anticipates that it will continue to increase, reaching 76% in 2023.

"Given the fiscal challenges and high levels of indebtedness, improving fiscal institutions should be a high priority issue," said Powell, IDB Senior Advisor and co-coordinator of the report.

"Stronger institutions would give a greater degree of credibility and allow a more gradual adjustment with lower interest rates to ensure debt sustainability," Powell says in the statement.

Governments spent $ 485 billion dollars in fiscal support during the pandemic, but most of these resources were granted in a few countries such as Brazil and Chile, where stimulus packages to the economy were large.

Two-thirds of the countries spent, on average, 3% of GDP, while in advanced economies they reached an average of 19%.

As of February this year, 15 million of the 26 million jobs lost at the peak of the pandemic were still missing in 12 countries in the region.

"Due to this

shock

, projections indicate that extreme poverty will increase from 12.1% to 14.6%, while moderate poverty will rise from 11.7% to 14.6%," reported the IDB .

"While the economic recovery from covid-19 may already be underway, previous crises have shown that the pace of recovery can be irregular and progress more slowly in high-productivity sectors," said Cavallo, IDB Principal Economist at the release.

“An increase in productivity through innovation and relocation, together with efficient investment in quality infrastructure with strong spill-over effects on other economic sectors will help the region seize opportunities to achieve more vigorous sustainable development in the post-pandemic stage. ”, He added.

The report anticipates that "in the coming months, the central banks will have to navigate dangerous and unknown waters" since, with interest rates already at low levels, the banks have fewer weapons.

“Those responsible for public policies should respect and maintain the independence of central banks, while these in turn must resist the temptation to assume the risk of private credit, or provide monetary financing to the fiscal deficit in a prolonged way.

History suggests that this will lead to greater economic uncertainty and high inflation, which is costly to reverse later ”.

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