NEW YORK — Latin American and Caribbean countries should prioritize debt reduction with the aim of boosting economic growth and more fruitful investment, the Inter-American Development Bank said in a report on Thursday.
Total debt in the region rose to near $5.8 trillion, or 117% of gross domestic product, from under $3 trillion in 2008, while public debt grew from 58% of gross domestic product in 2019 to 72% in 2020 as spending rose sharply in response to the COVID pandemic, the report showed.
More than half of the countries in the region spend more than 2.5% of GDP servicing debt and quarter spend more than 5% – similar to the amount spent on education. Higher interest rates across the globe highlight the importance of reducing debt levels.
For countries with high levels of spending and taxes as a share of output the focus should be on making revenue collection and spending more efficient, while those with revenue and taxes that are lower as a percentage of GDP should broaden the tax base and increase public sector revenues.
“Well-managed and sustainable debt can help unleash Latin America and the Caribbean’s abundant growth potential,” said Eric Parrado, the IDB’s chief economist.
He said the IDB’s aim was to guide the region down a “pro-growth agenda, where debt becomes an engine and not a drag.”
The report’s recommendations include a push toward stronger fiscal institutions, which would allow for more focused and efficient spending during growth cycles while saving for harsher times.
It also calls on governments to take advantage of multilateral lenders, who generally offer better terms.
“Besides providing lending at lower rates and longer tenors than private markets, development banks offer technical knowledge and other instruments to help countries manage risks,” the IDB said in a statement alongside the report.
Earlier this month, IDB president Ilan Goldfajn said the bank itself should be more effective in its lending, noting that just 53% of its completed projects in 2021 received a positive rating from an internal oversight office.
Moody’s said this week that Latin America and the Caribbean would be among the hardest-hit geographies were the global economy to spin into a debt crisis, even as the risk of that has ebbed. (Reporting by Rodrigo Campos, Editing by Rosalba O’Brien)