The coronavirus pandemic is a shock of unprecedented magnitude, uncertain duration, and consequences that- if not properly addressed- could lead to one of the most tragic episodes in the history of Latin America and the Caribbean.
While the crisis requires prompt and decisive action, policy responses in the region have been disproportionate across governments. While some have reacted promptly, making the protection of public health their prime objective, others have unfortunately tended to minimize the risks of the pandemic; misinforming citizens and disregarding both scientific evidence and experts’ advice. Rather than mobilizing all resources at their disposal, some leaders have chosen to play populist and divisive politics in the midst of this tragedy.
“In addition to the immense disruption of domestic production, Latin American economies are suffering from falling export volumes and prices, lost income from tourism and remittances, and large capital outflows. The supply shock in a big part of the economy coupled with a broader demand shock could trigger a contractionary spiral.”
To prevent this outcome, bold policies to protect the incomes of individuals and households are crucial. This involves providing cash transfers for those left in a vulnerable position by the crisis, including informal and independent workers who cannot access employment subsidies or unemployment insurance.
Supporting jobs and incomes of the labor force and relief to businesses are also essential processes– to allow them to cope during the period of widespread social distancing, and also to help ensure they recover afterwards.
“Subsidies to help firms pay their wage bill, contingent on the maintenance of employment, protect both companies and workers during the crisis and are crucial for a fast rebound of the economy when conditions normalize. If widespread bankruptcies are not prevented then the next victim of the crisis could be the banking system. At that point the payments system, and in fact the entire economy, would risk collapse” (America’s Quarterly
Many businesses, particularly small and medium enterprises, will suffer significant income losses for the duration of the crisis. Without additional support, lack of liquidity will eventually become a solvency problem.
According to America’s Quarterly
, tax deferrals, loan rollovers and subsidized credit will not be enough. Instead, this crisis calls for unprecedented credit guarantees provided by governments to ensure banks contribute lending, in addition to temporary changes in regulation to promote incentives for credit expansion. Well capitalized and well managed state-owned banks can also play a leading role. Fiscal stimulus will also be required over the recovery phase. Governments must stimulate employment and economic activity without exacerbating health-related risks. Policies will differ across governments, but extraordinary fiscal resources will likely be needed to bolster recovery.
While fiscal requirements are now much larger than during the global financial crisis, policy space in Latin American economies is narrower. Fiscal costs should be compensated with budgetary adjustments in low-priority areas. A commitment by executive and legislative branches to correct the greater resulting fiscal deficit (within a reasonable time period) could mitigate the risk of a credit downgrade now threatening several of our countries.
Latin American leaders should call for international cooperation to confront the crisis. Stronger global coordination among health authorities is needed to improve the capacity to conduct tests, treat and isolate patients, and develop a vaccine and cure; which will be the definitive solution to the COVID-19 pandemic. In the financial space, regulators, credit rating agencies, and accounting standards institutions must adapt their criteria to deal with the adverse systemic circumstances.
The IMF has an essential role to play– in both the short run to address countries’ foreign exchange and fiscal needs, and in the future to continue supporting economies through a crisis with an uncertain duration.
“Latin American governments should call forcefully for a new one trillion issue of the Fund’s Special Drawing Rights (SDRs). And while SDRs are allocated to member countries according to quotas, a non-proportional allocation could be achieved by creating a common pool overseen by the Fund, to expedite fiscal support to governments” (America’s Quarterly
Major central banks can further help to reduce foreign exchange liquidity tensions. Access should be broadened to swap lines with central banks that issue reserve currencies, which can be done directly, or indirectly through the IMF or the Bank of International Settlements (BIS) as intermediaries of central bank liquidity.
According to America’s Quarterly
, Multilateral Development Banks (MDBs) like the World Bank, the Inter-American Development Bank and CAF should double the amount of net lending to the region and tap highly liquid global capital markets to provide further budgetary support for countries, under much reduced conditionality.
The world- and Latin America- cannot afford delayed or inadequate responses. Mutual trust and transparency remain the best guideposts in these uncertain times. The crisis cannot be an excuse to weaken our hard-won democracies, but should instead become an opportunity to strengthen democracy in Latin America, and demonstrate it can deliver for citizens.