IMF tells Caribbean to slow public spending

(CNS): Two years after the onslaught of the global financial crisis real GDP in the Latin America and Caribbean region is set to expand by 5.7 percent in 2010 and 4 percent in 2011 the IMF has revealed. For most Caribbean countries, however, recovery is only beginning and prospects are still limited by high levels of public debt and weak tourism demand according to Western Hemisphere: Heating up in the South, Cooler in the North, an IMF report which was launched in Bogotá yesterday at a seminar hosted by the Central Bank of Colombia. The report recommends that normalization of fiscal policy be the first line of defense with emphasis on slowing the growth in public spending from recent high rates.

The report looks at the record of economic growth in the Caribbean countries and shows how public debt has hampered growth considerably. It argues in favour of a combination of fiscal consolidation to reduce this drag of debt on growth, and for reforms that boost productivity and foster the continued development of the tourism industry.

"The marked heterogeneity across the region means varied challenges for economic policy formulation," Nicolas Eyzaguirre, Director of the IMF’s Western Hemisphere Department, said. "For most of South America, it is all about the risks of too much of a good thing, to avoid possible excesses of demand and finance. In Central America, governments have to continue to be prudent, to rebuild their defenses and continue pursuing reforms to boost competitiveness. Caribbean countries generally have no space for fiscal stimulus due to their high debts and still have to push ahead with fiscal consolidation plans."

One of the most significant findings of the Regional Outlook is how domestic demand has been strengthening in the fastest-growing countries in South America. For such countries, the strength and momentum of domestic demand are likely to dominate their near-term growth prospects, provided advanced economies do not suffer any major setbacks. That is a different reality from the United States, where the recovery so far has been dependent on policy stimulus.

This edition of the Regional Economic Outlook has a special focus on financial sector issues. In particular, the report examines and draws lessons from the recent credit cycle in Latin America—the rapid growth of bank credit that ended abruptly with the global crisis, and which is resuming again in some countries. While the region’s financial systems were generally resilient to the crisis, the goal of avoiding financial crises brought on by excesses remains as challenging as ever.

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