IMF: Latin America and the Caribbean must discipline spending and increase their income

He International Monetary Fund said that fiscal policy in Latin America and the Caribbean has been “prudent”, but that governments need to increase their income, since there are not many options due to heavy debt and high interest rates.

“In a new era of higher interest rates, and just because the level of debt is higher than in other emerging markets, the region needs to make more consolidation efforts”said Rodrigo Valdés, director of the IMF’s Western Hemisphere Department (WHD).

“There are plans, now a lot of discipline is needed”.

Earlier this week, the IMF raised its growth estimate for Latin America and the Caribbean in 2023, to 2.3% from 1.9% in July, due to a greater than expected expansion in Brazil and Mexico.

In its regional outlook, published on Friday, the Fund highlighted the need to reduce the debt burden while meeting social demands.

“We have to recognize that fiscal policy was very prudent, with a lot of spending but a very rapid withdrawal of spending during COVID“, said Valdes to Reuters.

“However, before COVID we already had a relatively high level of debt in the region and that remains the case.”

High rates

The perception that interest rates will remain high for longer in the developed world has a double effect on emerging markets. Investors withdraw their money from the region, due to higher returns on lower risk assets, and the cost of loans increases and a greater part of the country’s income must be allocated to paying debt.

“Debt in the region is relatively long-term, so the impact of rising interest rates on costs is not immediate, but it will eventually come.“said Valdés.

“The world has become more complex. The climate, the commodity crises (…) and, therefore, it would be prudent to reinforce the (fiscal) policy margin”.