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IDB urges regional govts to band together for debt solution

Pointing to “worrisome” growth in debt in the region since the start of the COVID-19 pandemic, the Inter-American Development Bank (IDB) in a new report urged governments to reduce debt to more prudent levels to boost economic growth.

The report, entitled “Dealing with Debt – Less Risk for More Growth in Latin America and the Caribbean”, recommends that governments reduce debt by improving fiscal institutions, promoting fiscal consolidation beyond current plans, renewing their focus on debt management, having a deeper consideration of assistance to private firms and creating a regional forum on debt restructuring.

“Efficient institutions, such as well-functioning debt management offices and innovative debt instruments, are vital for managing debt composition. Pre-pandemic advances in improving debt composition have stalled and countries need to actively manage amortization schedules. Over half of the countries in the region face debt service of over 2.5 percent of GDP, and a quarter, more than five percent – a similar amount to the spending on education,” the report states.

“Countries should take full advantage of multilateral development banks and other official lenders providing competitive long-term financing. Besides providing lending at lower rates and longer tenors than private markets, development banks offer technical knowledge and other instruments to help countries manage risks.”

According to the most recent public debt statistical bulletin for The Bahamas, released in September, outstanding public sector debt stood at an estimated $12.1 billion at the end of September 2022. Foreign currency debt made up 46 percent, while Bahamian dollar debt represented 54 percent.

The Davis administration has set a long-term objective of 50 percent debt to GDP by the fiscal year 2030/31, driven by constrained expenditure and an aggressive attempt to expand the revenue base to a level of 25 percent of GDP by 2025/26. But the IDB warned that without rules to govern fiscal prudency, many regional nations will fall short of meeting their targets.

“Stronger fiscal institutions can encourage governments to stop overspending in good times, build a cushion to deal with bad times, and can help countries provide credible fiscal guidance to bring public debt levels down. Fiscal rules help governments set numerical goals for budget and macroeconomic aggregates in a transparent way, so they become accountable for these results. The study shows counties in Latin America and the Caribbean complied with only 57 percent of the targets specified in the rules due to poor design of the rules,” the IDB report states.

“Ingredients of effective fiscal rules include solid legal foundations, credible enforcement mechanisms, flexibility to deal with shocks, and well-defined escape clauses. Independent fiscal councils are also key for the effectiveness of fiscal rules and the promotion of responsible policies, because they oversee and monitor the implementation of such rules.”

The IDB report notes that total debt has risen in Latin America and the Caribbean to $5.8 trillion or 117 percent of GDP, from under $3 trillion in 2008.