COVID-linked debt on the rise

The International Monetary Fund (IMF) is expecting a significant rise in public debt levels in the Caribbean.

According to the Washington-based multilateral institution, this increase is a direct consequence of state actions in response to the COVID-19 pandemic.

In its latest outlook for Latin America and the Caribbean (LAC), the IMF said: “As a result of these discretionary fiscal actions, weaker economic activity, as well as the operation of automatic stabilizers, public debt levels in the region are expected to increase sharply in 2020.”

Noting that most LAC economies already had very little wiggle room prior to COVID-19, the Fund said the pandemic had worsened the situation.

The IMF document, which looked specifically at Fiscal Policy During the Pandemic, pointed out: “The economic fallout of the COVID-19 pandemic is having significant consequences for fiscal positions in the region through a variety of channels. Slower economic activity and increased Government spending, containment measures, shutdowns of entire sectors, and social distancing have led to a ‘sudden stop’ in labour supply and associated declines in sectoral and aggregate demand.

“The ensuing sharp decline in economic activity, both domestically and in trading partners, has caused a reduction in tax bases and revenues and triggered higher unemployment and social safety net spending. Weaker activity has also resulted in lower global prices in some commodities, especially oil, leading to lower commodity-related investment and lower fiscal receipts in exporting countries. At the same time, the provision of discretionary lifelines to households and firms against the pandemic has resulted in higher Government expenditures,” it added.

During the COVID-19 containment phase, the IMF said, countries in the Caribbean and Latin America made spending on health care and emergency services their first policy priority.

The second involved the adoption of timely, temporary, and targeted fiscal actions to protect households and firms, including in hard-to-reach informal sectors.

“Such support is likely to provide an effective cushion to output and essential consumption because it alleviates the drop in incomes for people with limited savings and reduces the likelihood of bankruptcies of viable firms,” the report said.

However, given the significant fiscal costs of the measures, the lending agency called for transparency to be embedded in the medium-term fiscal framework.

Providing some background to the current situation, the IMF explained: “The majority of countries in the region faced the pandemic with more vulnerable fiscal positions—higher fiscal deficits and public debt as per cent of GDP—than before the Global Financial Crisis.

“This was partly driven by the end of the commodity super-cycle that had lowered fiscal revenues in commodity producers (while expenditures remained relatively high) and partly due to low growth and high real interest rates.”

According to the IMF, the gross financing needs of Latin American and the Caribbean, coming into the crisis were generally high and this was consistent with the picture of limited fiscal space.

This, the IMF, explained was due in large measure to financing needs related to high levels of maturing debt.