By: Staff Writer
October 7, 2022
The World Bank said in a recent report that raising taxes for COVID-19 recovery is a sensible policy that can illicit important behavioural responses from citizens and businesses.
The bank in its October “Latin America and the Caribbean Economic Review: New approaches to closing the fiscal gap,” said that: “While for some countries, especially in Central America and the Caribbean, raising taxes might still be a sensible policy option to cope with the current fiscal deficits and the need to increase the provision of basic public goods, implementing tax rate hikes in many others would likely cause important behavioral responses by businesses and individuals —linked to large macroeconomic costs—and, thus, doubtful tax revenue increases.”
Most countries in Latin America and the Caribbean (LAC) face—with different degrees of severity—mounting concerns about debt sustainability due to four compounding factors. First, in several LAC countries, the debt stance was fragile even before the COVID-19 pandemic. This debt buildup reflected in part significant procyclical and rigid increments of public spending during the expansionary phase of the last commodity super-cycle (often referred to as the Golden Decade), as well as large countercyclical and persistent spending efforts during the global financial crisis in the late-2000s. To increase government spending in both good times (characterized by high revenues and low borrowing costs) and bad times (especially in a rigid manner, due to social and political pressures) is unfortunately a recipe for building up debt and risking debt sustainability.
On the other hand, “the region’s forecasted growth rates have been consistently upgraded since January—in contrast to the downgrades of the rest of the world. Latin America and the Caribbean (LAC) is thus closing the gap with global estimates pulled down by the war in Ukraine. Though net importers of food and fuel, such as in the Caribbean and Central American countries have been severely affected, and rising prices of these goods have stressed households across the region, the overall rise in commodity prices has been a boon to regional exporters in Colombia at least.”
The report also said: “While the positive regional evolution gives us hope of leaving the pandemic behind, uneven vaccination rates across the region remain a serious source of concern. Nicaragua, and Costa Rica all are above 80 percent, while Guyana and Colombia are seeing strong increases that will bring them there soon. However, many nations, mostly from the Caribbean region, have fallen desperately behind and face the risk that new variants could add another round of devastating economic effects, again paralyzing particularly the tourism sector.
The report spoke about distressed loans in the region: “Though concern remains about hidden distressed loans from firms especially damaged by the pandemic, financial sectors appear robust, again with some variation across countries. As of the end of 2021, the ratio of non-performing loans (NPLs) to total loans in the system is substantially below levels after the global financial crisis and in many cases is coming down.
“Most countries have NPL levels at or below their peak levels and substantially below those seen in the wake of global the financial crisis. Though reprogrammed loans may be pushing problems further down the road, to date, they remain far below their peak during the pandemic. Though NPL data are not available for the Caribbean, countries in the Eastern Caribbean Currency Union (ECCU) do not show especially large rates of reprogramming.”
It added: “Strong countercyclical fiscal policies across the region to support vulnerable households and firms during the pandemic eroded the little fiscal space gained by countries in the region in previous years. The Caribbean was hit particularly hard. Dominica, Saint Vincent, St. Lucia, and the Bahamas all have relatively large deficits, with deficits in the first two countries still exceeding six percent. Overall, in the region, progress has been made in reducing primary deficits (as percent of GDP). They have fallen by 0.96 percentage points, on average, across 2022. However, rising interest payments have led to overall deficits similar to those in 2021
With COVID-19 receding in most countries, the economies of Latin America and the Caribbean are in reasonably sound condition and doing better than many other regions. The region is adversely affected by the slowdown of growth in the G-7 and China, as well as attempts by monetary authorities around the world to curb inflation through higher interest rates. On the other hand, while the war in Ukraine has raised fuel and food prices, putting stress on net importers, especially in the Caribbean.