By: Kimberly Ramkhalawan
October 14, 2022
Reina Mejía, IDB President, kicked off the Meeting of the Network of Central Banks and Finance Ministers of Latin America and the Caribbean by telling them to be more mindful with their public spending.
In giving what was described as a current review of the region’s “economic reality and insights into how a brighter future can be created, Mejía said “extraordinary challenges call for extraordinary commitments and leadership that will prioritize the impact it will have on people”.
She was addressing the 56th Meeting of the Network of Central Banks and Finance Ministries of Latin America and The Caribbean.
While she explained that “Russia’s war had generated new significant challenges including a sharp increase in commodities and a slowdown in growth, the IMF had projected GDP growth at 3.5 percent in 2022, a decrease in seven percent in 2021.
As for growth forecast for 2023, she shared that across the board this has been “revisited and revised to 1.7 percent as policy dilemmas intensify”. However, at this projected growth, the region will continue to lose its share in global GDP and will affect the aspirations and expectations of its citizens. Currently she says the greatest challenge for the world economy is to combat increasing inflationary pressures.
Mejía shared that while “across Latin America and the Caribbean, skyrocketing prices for basic goods are linked to primary supply factors and less to monetary aspects, as it is with high demand. One risk is that when inflation spirals out of control, making it more difficult to reverse the trend and possibly requiring more aggressive monetary adjustments”. She added this had presented an additional challenge to policy makers as, while there are limits for what monetary policy can do on their current context, the new IDB president reminded them that “expectations cannot come alive on their own”, and expressed her worries “that inflation has a disproportionate and negative effect on the poor who have the tools to combat it”.
Meanwhile, she gave estimates to indicate that in a scenario of a 20 percent increase in food prices, will generate 9.5 million people falling into poverty in the region, and likens it to be bigger than the population in New York City.
She noted while “policy makers have tried to mitigate the impact of high inflations via transfers and subsidies, still there is limited space for fiscal expansion due to debt levels having already increased during the pandemic”.
Mejía adds that there must be more controlled public spending and being efficient with the public purse, as a cash transfer large enough to cover the deficit of basic food, or large enough to cover basic items for the whole population, translates into an approximate “$1.3B a month or 0.4 percent of the region’s GDP”.
She estimates the region can save about four percent of the GDP by ensuring transfers are only given to those who really need them, while eliminating other pricing in purchases, cash transfer problems expanded also to reach new and vulnerable populations that might fall into poverty like women, migrants, minorities and groups in rural areas that are very hard to reach.
Mejía says the region was in a place to utilize the instruments put in place during the pandemic to advance itself and help those who need it. She urged “policy makers to take advantage of the new digital technologies that resulted from the pandemic and use this to assist themselves in an effective way”, as the “region should not be taking any steps backwards in the road to digital transformation”.
At the same time, she says the region should “also not lose focus on its priorities for long term growth that is sustainable and inclusive such as climate financing and social spending”. She called on “development banks to boost lending and explore financial innovations toward this cause” while sharing that the “IDB had a suite of new instruments to help better target and measure the public spending of climate action and other instruments to raise more financing on climate related projects”. Noting that the “IDB group has been a pioneer in establishing a green bond market through loans and guarantees, anchor investments and technical corporations, she adds that today, IDB and the IDB Invest have supported 36 clients to issue 74 thematic bonds, including sustainable blue bonds and social, 30 percent of this volume has been issued and supported through the IDB”.
Addressing the recent dismissal of Mauricio Claver-Carone as IDB President, and her taking up the role, Mejía notes despite the IDB having its “own internal issues”, she gave the commitment on behalf of the IDB to help Latin America and the Caribbean to realise its full potential is unwavering and its work continues to that end with focus and determination, passion, and commitment that they have the tools to support the region.