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2% economic growth predicted for the region

April 20, 2024

WASHINGTON, CMC – The International Monetary Fund (IMF) says Latin America and the Caribbean (LAC) region have shown “quite a bit of resilience” and that the rebound from the coronavirus (COVID-19) pandemic has been stronger than previously expected.

“We see resilience partly as a result of countries’ progress in strengthening their macroeconomic frameworks. With most economies now operating near potential, however, activity in the region has been generally moderating in recent quarters,” Rodrigo Valdes, the Director of the IMF’s Western Hemisphere Department told reporters at the bank’s annual Regional Economic Outlook Press Briefing for the Western Hemisphere.

He said on the positive side, labour markets have remained pretty resilient, with unemployment still at historically low levels almost everywhere.

“With an external environment that, at least on the trade side, is weakening and the effect of monetary policy tightening to bring down inflation in the region and those effects still materialising.

“We expect growth in Latin America and in the Caribbean to moderate further this year. Slowing from 2.3% the region grew in 2023 to 2% this year. We see risk around this baseline projection as broadly balanced. This is not, as we saw this in the past, this is good news, and this reflects basically more balanced global risks,” Valdes told reporters.

He said the region’s medium-term growth is projected to average about 2% in the next few years, and this is well, well below the growth rate of peer economies in other regions.

Valdes said with regards to Haiti, the Washington-based financial institution has been engaged “very closely with Haiti in the last few quarters.

“We have a staff monitoring programme there. But at this point, the priority really is to restore security. This is a precondition for macroeconomic stability and for growth to materialise.

“We are projecting 3% negative growth this year, given the latest developments. And we’re closely monitoring the economic situation, including through big data.

“We have a lab in the Fund with that, and we’re also monitoring political developments, including the next steps of the newly foreign presidential council. But we will continue engage during this difficult time within the mandate that the fundamental has,” Valdes told reporters.

He said as it relates to the twin island Federation of St. Kitts-Nevis, the country has “ been growing very well.

“ We expect that the economy will continue to grow by 3% on average in the medium run. 3%, medium run is higher than the average of the region,” he said, adding “we think that it’s very important to continue advancing in the transition to renewable energy, to increase capital expenditure in water, infrastructure and climate adaptation, also to better target current expenditures.

“We have put emphasis on tax reform and revenue mobilisation to reduce reliance on citizenship by investment (CBI), which is a welcome income source. But we cannot bet that is forever there,” Valdes said.

Under the CBI programme, St. Kitts-Nevis provides citizenship to foreign investors in return for making a substantial investment in the socio-economic development of the Federation.

Valdes told reporters that the Caribbean region has done “pretty well in the last few years,” noting that “if you would have put the shocks that were coming five years ago in the future, I would have been very worried.

“And reality is that the economy has recovered. The Caribbean region went back to activity levels pre-COVID. Some countries are growing faster than others, particularly to notice very strong growth. But there are others, too”.

He said that the group of countries that are more tourism dependent rebounded very quickly and are normalising.

“And the following message is valid for all countries in the region. We’re going back to normal growth. If we want more growth, what is needed is to work through the underpinnings of long-term growth with reforms of different types. And that’s critical as a message for the Caribbean, too.

“By the way, on the Caribbean that I didn’t mention the issue of access, there are no plans to change our definitions of which country is either, which is not one who has concessional lending, et cetera.

“Those are rules that are given. But we understand that there is an interesting discussion about other measures of vulnerability. Now, there is no consensus on that. So really is discussion ongoing.”

Valdes said very importantly, the IMF is “pretty flexible when we design programmes.

“When we design a programme, we take into account vulnerability. And part of our advice to the region, to the Caribbean region, is, given the effect of natural disasters that happen there, in terms of how often and how big, it’s very important to have fiscal space to tackle that in preparation.

“So this recommendation of fiscal restraint in the short run, to build up space, to build up buffers, applies squarely also to the Caribbean,” Valdes told reporters.

The IMF senior official said that on the issue of inflation, while it is receding throughout the region “we project that it will continue falling during this year, thanks to swift actions of the region’s central banks and also, of course, the global disinflation trend that reflects monetary policy elsewhere, and also that the supply side shocks are normalising”

He said risks to inflation have also become more balanced than in the past.

“With inflationary pressures subsiding since 2023, the region’s central banks have started to reduce rates, although policy rates remain in contractionary territory. Our view is that more policy easing should continue, although it will be very important to carefully calibrate the pace of easing to strike a balance between durably bringing inflation back to target in the final stretch and also avoiding an undue economic contraction.”

Valdes said on the other hand, with public debt at high levels,  the IMF believes that fiscal policy should focus decisively on rebuilding policy space.

“This is not very different from the message we have for many regions in the world, but this applies especially to our region.

“As we highlighted in the past, most countries in the region have withdrawn the pandemic-related fiscal stimulus and have ambitious plans to strengthen policy finances. However, we have high debt from before the pandemic.

“In the period where commodity prices declined, countries took some time to adjust to that, and before the pandemic, we already had high debt. And today we see that risks of slippages are increasing as consolidation plans are being postponed.”

Valdes said faster consolidation is needed to put public debt on a stronger footing.

“Timely fiscal tightening will also allow for faster normalisation of the monetary policy mix. For macro, you need to think of both together, for the policy mix. Moreover, to be durable, fiscal adjustment will need to include revenue mobilisation to protect key social spending.”

Valdes said maintaining social cohesion should be a centrepiece of a fiscal consolidation plan given the region’s high, still levels of poverty and inequality.

“However, fiscal consolidation is not the only task, the only thing that is urgent. It’s important to macroeconomic stability. But for social challenges, we also need to grow, and this is my third message. It’s urgent to take action to raise potential output growth,” Valdes told reporters.

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