Economies to take big fall, says IDB

A sharp decline of between 1.8 per cent and 5.5 per cent in economic growth for the Caribbean and Latin America – the result of the COVID-19 pandemic – the  Inter-American Development Bank (IDB) predicted today.

In its latest Macroeconomic Report, the IDB said the numbers were based on four scenarios with varying external shock impacts – moderate, strong, severe and extreme.

The ‘severe’ scenario would imply a 12.2 per cent loss of the region’s GDP over three years and the ‘extreme’ model would mean a loss of 14.4 per cent over the same period.

With the prediction skewed towards the lower end of the spectrum, the bank said: “The economic damage will carry into 2021 and 2022 unless governments implement well-focused programmes to offset the impacts.”

The 58-page report provides fiscal, monetary and financial policy recommendations for countries in the face of the region’s most severe economic challenge since the global recession, when the region had witnessed a two per cent decline in gross domestic product.

Pointing out that the region’s economy was able to grow at over six per cent in 2010 and was given access to capital markets, stronger fiscal balance sheets and commodity prices, the IDB said: “The challenge will be to find the right policy mix to ensure a swift recovery this time around”.

IDB’s Chief Economist Eric Parrado said: “Our region will suffer an economic shock of historic proportions,” adding that “countries should be saving lives, by ensuring social distancing and providing their health sectors with adequate resources. Complementary and temporary economic interventions can support economies during the partial, organized shutdowns.

“We need to preserve the core of our economies intact to improve the chances of a quick rebound.”

He said to aid in this process, governments should be providing relief to more vulnerable households that have lost their sources of income, helping and giving incentives to firms to reduce liquidations and avoid separation from their employees, and extending liquidity to banks so they are part of the solution.

The development bank said financing may be a constraint in the region, but suggested countries seek greater efficiencies, divert non-essential spending, and borrow and tap central bank balance sheets to some degree.

It said interventions should be calibrated carefully and evaluated to ensure they reach their intended beneficiaries, adding that policymakers should consider how such policies would be phased out to ensure fiscal sustainability beyond the coronavirus crisis.

The IDB report said: “The region has made great strides in delivering low and stable inflation across a variety of monetary regimes. This is one piece of good news when it comes to fighting the coronavirus. Given these initial conditions, there is a lower risk that the suite of interventions being considered will lead to inflationary conditions that would further hurt the poor.”

It recommended that central banks “think carefully” about combining the many tools at their disposal in a way to provide maximum relief.

It said: “Interest rate policy may be most appropriate in those countries where inflation expectations are well-anchored, where the pass-through from any currency depreciation to inflation is limited and where the transmission mechanism to market interest rates is relatedly strong.

“Countries that do not meet these conditions may wish to focus more firepower on direct tools or unconventional monetary policy, such as lowering reserve and liquidity requirements, purchasing assets, and providing liquidity to banks and other financial entities. If conditions deteriorate and the right legal and policy framework exists, they may wish to consider extending liquidity to other entities.”

Pointing out that the region had been pursuing significant fiscal adjustment, the IDB said debt levels are likely to worsen under the current COVID-19 outbreak.

It noted that the focus in the region had changed from reducing poverty and inequality to fighting the disease crisis.

The IDB said: “The exceptional fiscal programmes to provide relief will put further pressure on fiscal balances.

“Under this new scenario, improving efficiency in the expenditure by targeting that spending more accurately to benefit the poor, informal workers, and those in need during this crisis is key.”

The report said subsidy programmes and transfers were needed in these circumstances, but sunset clauses or other techniques to ensure such exceptional financing was temporary were also required to ensure there was no repetition of past mistakes.

The IDB said it was making up to $24 billion (US$12 billion) available this year to help countries cope with the coronavirus impacts, while IDB Invest, the IDB Group’s private sector arm, was providing an additional $10 billion (US$5 billion).

It has also launched an information hub highlighting the Bank´s research and priority areas to support countries in the face of the coronavirus crisis.

marlonmadden@barbadostoday.bb