As the global recovery continues to struggle to gain its footing, growth in Latin America and the Caribbean has been marked down further and is likely to contract for the second consecutive year in 2016, the IMF said.
The IMF’s latest Regional Economic Outlook for the Western Hemisphere, released yesterday in Mexico City, projects that the region is set to contract by 0.5 percent in 2016—marking two consecutive years of negative growth for the first time since the Latin American debt crisis of 1982–83.
The IMF says that rate masks the fact that many countries continue to grow, modestly but surely, whereas a small number of economies—representing about half of the region’s economy—face recession largely as a result of domestic factors.
The deceleration in activity reflects weak external demand, further declines in commodity prices, volatile financial conditions, and for some important domestic imbalances and rigidities, the report said. At the same time, many countries have continued to experience large exchange rate depreciations, mainly as a result of deteriorating terms of trade and external demand.
For 2017, the IMF expects the region to bounce back to 1.5 percent growth.
In the Caribbean, growth prospects continue to be favourable for the tourism-based countries. In contrast, growth prospects are deteriorating for commodity-based economies.
According to the IMF, growth prospects over the next five years will likely remain subdued, particularly for those facing lower commodity prices and weak investment. And it said that throughout the region, policies and economic reforms should be designed to manage this transition.
“Where further accommodation might be warranted, macroeconomic policy space is limited. In particular, fiscal space is constrained by high debt, slower growth, and lower commodity revenues,” it said.
“Exchange rate flexibility continues to be critical to helping economies adjust to persistently lower commodity prices. Where central banks enjoy strong credibility and exchange rate pass-through to inflation is limited, monetary policy can remain accommodative if needed to support demand. However, monetary policy should be geared toward preserving central bank credibility, if medium-term inflation expectations are rising.”
The report also mentioned that growth in Latin America and the Caribbean is expected to remain below historical trends for the foreseeable future. It cited several reasons, such as inadequate infrastructure networks, shortcoming in quality education, and relatively low export diversity, in addition to lower commodity prices, and said structural policies aimed at resolving some of these bottlenecks could help raise potential output.