Countries in Latin America and the Caribbean need to rise to the challenge to lower inflation and reduce the public debt burden in 2023, the Inter-American Development Bank’s (IDB) annual Macroeconomic Report says. 

Also, it is critical for the region’s countries to address the triple challenge of growing social demands, limited fiscal resources, and low productivity and growth. 

According to the report, Preparing the Macroeconomic Terrain for Renewed Growth, the baseline scenario sees the region growing by 1% this year after better-than-expected growth of 3.9% in 2022. A growth scenario that reaches 1.9% in 2024 assumes the United States will avoid a recession in 2023 and that there will be a downward global trend in inflation.

The Russian invasion of Ukraine in 2022 sent shock waves across the world. Commodity prices soared, growth expectations plummeted, central banks increased interest rates to tame inflation, and there are continued sources of economic and financial uncertainty. As a result, in 2023, Latin American and Caribbean countries face depressed global demand, high financing costs, and recent financial uncertainty.

“As the world adjusts to the consequences of overlapping shocks, many risks have appeared on the economic horizon for Latin America and the Caribbean,” said IDB Chief Economist Eric Parrado. “Policymakers need to navigate these waters carefully by coordinating the right mix of monetary, fiscal, financial, and other relevant economic measures to return to a path of sustained economic growth.”

Monetary and fiscal policies

On the monetary front, countries will need to maintain or tighten their policy stance to ensure inflation returns to its targets by 2024. The median annual inflation rate in Latin America and the Caribbean reached 9.6% in July 2022, the highest since the global financial crisis in 2008. In most countries, inflation has fallen after that peak, but remains high throughout the region. The independence of central banks is crucial and a priority for controlling inflation, the report says.

The need to reduce inflation will contribute to the expected economic slowdown in 2023. The report recommends short-term policies to reduce the impact on the most vulnerable, including implementing targeted subsidies. In the medium and long term, policies that stimulate investment in physical and digital infrastructure, improve the functioning of labor markets by reducing incentives for informality and promote productivity, will contribute to a return to healthy growth levels.

The publication also recommends fiscal policy plans to increase the efficiency of expenditure and tax collection, improve fiscal institutions, and adequately manage debt.

The report’s scenarios suggest that sovereign debt could grow, signaling the need for policies to adjust fiscal accounts. On average, public debt in the region fell to 64% of GDP in 2022 after rising sharply during the pandemic. IDB studies recommend that governments in the region reduce public debt ratios to a prudent range of 46-55% of GDP.

The report recommends that countries take advantage of long-term financing from multilateral development banks to improve their debt composition. Exchanging expensive short-term debt for long-term debt at lower costs would benefit many of them.