Thursday, March 23, 2023

The IDB urges Latin American countries to reduce debt to boost economic growth

The countries of Latin America and the Caribbean should prioritize debt reduction “to prudent levels” to boost economic growth and favor investment, according to the report ‘Dealing with debt, less risk for more growth in Latin America and the Caribbean ‘, of the Inter-American Development Bank (IDB).

Said study reveals that the total debt of the region has increased to 5.8 trillion dollars, or 117% of GDP, from less than 3 trillion dollars in 2008. For its part, public debt grew from 58% in 2019 to 72 % in 2020, due to the different tax packages promoted to deal with Covid-19.

In this sense, the IDB has pointed out that high levels of debt can “hinder” development, because they displace private investment and force governments to divert resources to pay interest, instead of allocating them to infrastructure and public services. Furthermore, they reduce the ability of countries to respond to future economic shocks and increase the risk of a crisis.

“The pandemic, the Russian invasion of Ukraine, high inflation, rising interest rates and low global growth, combined with high debt, increase the region’s vulnerability,” the report says.

Given this scenario, governments should reduce their percentage of public debt, from an average of 70% to a range of 46%-55% of GDP, this being a “prudent” level, according to the IDB.

Thus, some of the policies that can be applied to reduce this figure are strengthening fiscal institutions or achieving a better balance between efficient public spending and sufficient revenue. “Well-managed and sustainable debt can help unlock the abundant growth potential of Latin America and the Caribbean,” said IDB Chief Economist Eric Parrado.

Fiscal institutions can encourage governments to stop overspending “in good times” and create a buffer against “bad times”. Meanwhile, countries with high levels of spending should focus on improving the efficiency of both revenue collection and spending.

Other opportunities include reforms to reduce labor informality, such as reducing tax incentives for companies to hire informal labor.

Finally, the IDB has encouraged countries to “take full advantage” of multilateral development banks and other official lenders. “In addition to offering loans at lower rates and longer terms than private markets, development banks offer technical knowledge and other tools to help countries manage risk,” the bank has argued.


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