The Director of the Western Hemisphere Department of the International Monetary Fund (IMF), Alejandro Werner, Friday said Latin America and the Caribbean have become the new coronavirus (COVID-19) global epicenter.
He said the human cost has been tragic, with over 100,000 lives lost. The economic toll has also been steep.
Werner said that the IMF’s World Economic Outlook Update now estimates the region to shrink by 9.4 per cent in 2020, four percentage points worse than the April projection and the worst recession on record, noting that a mild recovery to plus 3.7 per cent is projected in 2021.In his “Outlook for Latin America and the Caribbean: An Intensifying Pandemic,” the IMF official warned that countries should be cautious in reopening their economies and allow science and data to guide the process.
He said Caribbean economies have managed to flatten the COVID-19 curve, but their key lifelines have collapsed.
“We stand ready to use the IMF’s financial clout…to help Latin America and the Caribbean achieve a stronger recovery.”– IMF Director of the Western Hemisphere Department, Alejandro Werner
“With tourism coming to a virtual standstill and key source markets in advanced economies plunging into deeper recession, the region is likely to experience a very sharp and protracted contraction in economic activity.
“Despite the reopening of borders starting in June for some Caribbean countries, international tourist arrivals are expected to return to pre-crisis levels only gradually over the next three years. In addition, the steep drop in oil prices is hurting commodity exporters through a loss in exports and fiscal revenues. The ongoing hurricane season poses additional risks,” the IMF official added.
He said the rates of COVID-19 infections and deaths per capita are approaching those in Europe and the United States, with the total number of cases accounting for about 25 per cent of the worldwide total.
“Against this backdrop, countries should be very cautious when considering reopening their economies and allow science and data to guide the process. Indeed, many countries in the region have high levels of informality and low preparedness to handle new outbreaks, like a high occupancy of intensive care unit beds and low testing and tracing capacity,” Werner said.
The IMF official said weaker economic data and more protracted COVID-19 outbreaks explain the significant downward revisions compared to the April forecasts.
He said first quarter growth was worse than expected for most countries, while high frequency indicators – like industrial production, electricity consumption, retail sales, and employment – suggest that the decline in the second quarter will be deeper than projected in April.
“The pandemic’s still rapid spread indicates that social distancing measures will need to remain in place for a longer time, depressing economic activity in the second half of 2020 and leaving more scarring going forward.
“Despite the difficult outlook, external financial conditions have eased in recent weeks, largely reflecting strong actions by advanced economies’ central banks, which have allowed some countries to issue debt abroad. However, financial conditions are still tighter than before the pandemic and are expected to remain volatile going forward.”
But Werner said risks remain elevated. The pandemic could worsen and last longer, depressing economic activity, stressing corporate balance sheets, raising poverty and inequality, and rekindling social tensions across the region.
“Upside surprises could also happen. Some recent high frequency indicators for advanced economies have been better than expected. Global growth could be stronger than expected, supporting exports, commodity prices, and tourism.”
He said the immediate priority for fiscal policy is to continue protecting lives and livelihoods, which given the limited fiscal space in the region, will require reprioritising expenditure and increasing its efficiency. “Policymakers will need to find creative ways to reach different segments of society, especially where informality is high. The fallout from the pandemic and associated policy response will also raise medium-term debt sustainability concerns in several countries. Commitment to a medium-term plan of fiscal consolidation and growth-enhancing structural reforms will be key to mitigate these concerns.”
He said monetary policy should remain accommodative given the subdued inflation outlook, negative output gaps, and elevated unemployment. Additional policy rate cuts and measures targeted to specific markets should be considered where necessary and possible, to support economic activity and ensure proper functioning of financial markets.
Werner said measures to maintain employment relationships, such as payroll support and financing of working capital will be important to avoid the closure of otherwise viable businesses, reduce long-term unemployment, support the recovery, minimise scarring and increase potential growth. Containment and mitigation policies should be appropriately calibrated to avoid a second pandemic wave and manage localised outbreaks.
Werner said that the IMF has acted swiftly to support its membership with quick and significant injections of emergency financing.
“Of the 70 loans approved since the pandemic began, totalling US$ 25 billion, 17 were for countries in the region, for a total of US$ 5.2 billion,” he said, adding “we stand ready to use the IMF’s financial clout, policy advice and capacity development resources to help Latin America and the Caribbean achieve a stronger recovery”.