By: Staff Writer
January 31, 2023
The Inter-American Development Bank (IDB) said in its, “Dealing with Debt: Less Risk for More Growth in Latin America and the Caribbean,” book that debt in the region has ballooned to USD$5.8tr, which represents some 117 percent of GDP.
Countries around the region are going to have to band together to help solve this “conundrum” they have found themselves in.
The book also said: “Debt may be good or bad. If the financing obtained is used to increase high-quality investment and provide better services, then benefits should outweigh costs. But if debt levels become too high or debt is not managed effectively, then the effects are negative. Interest rates rise, the cost of servicing the debt becomes very burdensome, and new debt becomes expensive or impossible to issue. Investment and growth suffer.”
High levels of debt are unsustainable, with economic instability leading to further political instability as there is less money to go around to fund necessary projects and welfare initiatives for citizens.
The bank added: “Given the dangers of excessive debt, the current situation in Latin America and the Caribbean is worrisome. Debt has risen to some USD$5.8tr or 117 percent of gross domestic product (GDP) in the region، and as much as 140 percent of GDP for the five largest economies.
Public debt soared to 71 percent of GDP during the pandemic، and corporates issued substantial amounts to survive the crisis. In 2020, the additional financing was used to counter the negative shock of the pandemic when the economy was at a standstill. Financing was employed to allow households to buy food and healthcare and permit firms to pay wages. While justifiable, the result was a burgeoning debt. The debt conundrum is real: it helped the region weather the pandemic but is now weighing down the economy.”
It continued, “Latin America and the Caribbean faces challenging times. The aftermath of the pandemic, the Russian invasion of Ukraine, inflation, rising global interest rates, a strong dollar، and the need for tight monetary policy at home, all paint a difficult picture for the region in the coming years. High debt levels imply less room to manoeuvre، and policy actions should be carefully calibrated. The greater the global challenges and the more uncertain is the environment, the more important it becomes to make robust and credible plans at home.”
Some of the solutions to solving the debt conundrum are already being employed across the region, but the IDB reiterated that credible consolidation plans need to be updated to face the new, post pandemic world after all of the excessive social spending that took place between 2020-2022. “The best way for a country to reduce debt levels through fiscal consolidation depends critically on each country’s specific characteristics; there is no one-size-fits-all set of recommendations. All countries should focus on improving the efficiency of both spending and tax revenue collection. In particular, the quality of public investment can be enhanced at all stages of project cycles, as can the efficiency and targeting of transfer payments. Prior to the pandemic, even at the lower levels of spending, the IDB estimated that simply improving spending efficiency could result in savings of over 4 percent of GDP. These measures are particularly important for countries where both public revenues and spending are high as a percentage of GDP. In this group of countries, raising taxes is likely to be counterproductive, and additional savings probably has to come from cuts in spending.”
The bank also said: “The pandemic created the need for sharply higher spending while it reduced tax revenues, thereby further increasing public debt. Naturally, the concern is whether this debt increase will provoke problems of sustainability, a new debt crisis, and another lost decade for the region. Debt sustainability is complex; it relates to the concept of solvency but also incorporates elements of cash-flow, to ensure a debt crisis due to a temporary lack of resources does not ensue. In addition, sustainability today depends critically on expected action in the future. Where there is confidence that countries will act to reduce deficits and run primary surpluses to bring down debt in better times, then higher debt levels can be supported.”
The book also said: “International financial institutions responded to the pandemic with new resources and initiatives to assist countries, particularly those with debt distress. The IMF and MDBs boosted disbursements and a new allocation of IMF Special Drawing Rights (SDRs) provided US$650 billion to IMF members, who continue to discuss how to best reallocate those resources to developing countries. The international community focused on providing debt relief to low-income countries. The Debt Service Suspension Initiative (DSSI) offered a temporary suspension of debt payments and its successor, the Common Framework, continues to offer the potential for debt relief…”