IDB study reveals that the region’s total debt increased to US$5.8 trillion, or 117% of GDP, from less than US$3 trillion in 2008 and public debt grew to 72% in 2020
The countries of Latin America and the Caribbean should prioritize reducing debt to prudent levels to boost economic growth, foster productive investment and reduce the risk of a debt crisis, according to a new flagship report from the Inter-American Development Bank (IDB).
The study reveals that the region’s total debt rose to US$5.8 trillion, or 117% of GDP, from less than US$3 trillion in 2008. Meanwhile, public debt grew from 58% in 2019 to 72% in 2020 due to tax packages related to the covidlower income and recession, according to the publication “Dealing with debt, less risk for more growth in Latin America and the Caribbean”, part of the series Development in the Americas of the IDB.
High levels of debt can hinder development, because they drive investors to demand higher returns, crowding out private investment and forcing governments to divert scarce resources to pay interest, instead of investing in infrastructure and public services. High debt levels also reduce the ability of countries to respond to future economic shocks to support households and businesses, and increase the risk of a crisis. The pandemic, the Russian invasion of Ukraine, high inflation, rising interest rates and low global growth, combined with high debt, increase the region’s vulnerability.
Given this scenario, governments should reduce their percentage of public debt, from an average of 70% to a range of 46%-55% of GDP, a level that the study considers prudent, always taking into account that the range will vary in each country. depending on its specific characteristics. Countries dependent on volatile commodity income should further reduce their debt levels.
“Well-managed and sustainable debt can help unlock the abundant growth potential of Latin America and the Caribbean,” said Eric Parrado, IDB Chief Economist.
“Our report presents a pro-growth agenda, in which debt becomes an engine rather than a drag on growth. It offers the governments of the countries of the region comprehensive policy recommendations to strengthen macrofiscal institutions, reduce public debt, and ensure a favorable financing environment for companies,” he said.
