IDB urges Latin America and the Caribbean to reduce public debt

Latin American and Caribbean countries should reduce their debt-to-GDP ratio from an average of 70 percent to a “prudent range” of 46-55 percent of GDP, the report said. Inter-American Development Bank (IDB) who proposed the administration public debt and strengthening fiscal institutions in the region to achieve economic growth.

On Tuesday in Lima, the IDB presented a report “Dealing with debt, lower risk for higher growth in Latin America and the Caribbean” Taking the case of Peru as an example, which stood out for its “macroeconomic stability and fiscal strength” in the years before the pandemic, according to the IDB’s representative in the Andean country, Tomás Bermúdez.

Peru’s medium-term fiscal consolidation plans are consistent with prudent debt levels, which range between 28 and 33%, the IDB noted.

One of the co-authors of the report and the IDB’s leading expert on the sector, Oscar Valencia, explained to EFE that “one of the great challenges the region is facing is the increase in debt that occurs not only because of covid, but also before the pandemic.”

The study presents five recommendations to the countries of the region to “attack these increases”, the first of which is to strengthen fiscal institutions.

“Peru is an example of this, it has very strong fiscal institutions that include good fiscal rules, fiscal frameworks and linking debt strategies to fiscal frameworks,” Valencia said, but “always maintaining prudent debt levels” to contain negative events.

Another fundamental aspect is how “this is used for greater growth”, because “more is needed to carry out successful processes of fiscal consolidation”, he pointed out.

Likewise, a third aspect is “targeting mechanisms” to serve vulnerable populations and also “to reduce funding frictions in our companies,” Valencia added.

Other recommendations of the report are the improvement of debt management in cooperation with multilaterals to approach prudent levels of indebtedness and the creation of a regional forum to discuss debt-related issues.

The expert confirmed that it is necessary “to return the effect of each resource in terms of growth, and not only in growth, but in reducing social gaps”, which have deepened in the region with the pandemic.

The IDB report suggests prudent management of public debt and strengthening of fiscal institutionsafter the pandemic, the region’s total debt doubled to $5.8 billion, and public debt rose to 72% of GDP.