LATIN AMERICA MULTIPLE CRISIS AND A NEW WAVE OF DEBT

The impact of Covid-19 will be devastating and long-lasting for the region. Several international organisations have projected that this could be another lost decade for Latin America. A contraction of 9.4% in 2020[1] will result in the increase of inequality and poverty, with almost 29 million new poor in the region[2], the loss of 31 million jobs[3] and the exacerbation of gender gaps, both in the economic sphere and in the use of time. In the face of an unprecedented crisis, life must be prioritized. The vast majority of people still face the dilemma of starving or dying from Covid-19.

Before the outbreak of Covid-19, many Latin American countries already had fiscal problems. All countries in the region, with a few exceptions in the Caribbean, held a fiscal deficit before 2020. Argentina, Bolivia, Brazil, Costa Rica and Ecuador registered the highest deficit levels in 2019, above the Latin American average of -2.8% according to ECLAC. In addition, in some cases a higher debt service is projected in the next years[4]. In the case of Perú, the IMF projected an increase close to a 100% on its debt service during the next 4 years.

A reduced fiscal space is worsened by a reduction of tax revenue and an economic contraction that will have a severe impact on future tax collection. In this context, the new indebtedness as the main option offered by the global financial community to LA, involves a risk of a higher debt service burden, placing countries again into the dilemma of prioritizing debt service payments over social protection.

Latin America needs concessional financing. Most countries in the region are classified as middle-income countries which would lead to mainly non-concessional credits. The lack of access to low interest loans will increase the debt risks in a context of a new wave of debt.

The solution to the crisis cannot be with a new wave of debt. Among the main recent loans in the region is the IMF Covid-19 response initiative, where 10 countries in LA have requested the Rapid Financing Instrument (RFI) with a concessional interest rate (up to 1.5%) and with a short repayment term (5 years). Average disbursements were of USD 300 million per country, which gives countries a brief respite, however, likely to be insufficient to face the magnitude of the crisis. A part from that, other countries of the region are able to access the resources provided by the IMF through conventional credit programs and agreements that involve traditional conditionalities.

Vulnerable economies need a debt service cancellation. Given the high liquidity needs to face the pandemic, a debt service suspension should be extended in time and expanded to vulnerable middle income countries. However, a suspension is only a deferment of the problem: a debt service cancellation must be guaranteed since it brings liquidity without contributing to the debt snowball in the upcoming years.

Liquidity is urgent. A swift way with no conditionalities under highly concessional terms to deliver fresh resources is the issuance of Special Drawing Rights (SDR). This tool does not constitute a new debt with principal repayment and can also be used as budget support. For Latin American and Caribbean countries - the vast majority of which are middle-income countries, it constitutes a conjuncture need. A substantial issuance is fully justified, not only because of the needs of the countries of the region but also in comparison with the huge injections of liquidity by rich countries.

[1]https://blog-dialogoafondo.imf...

[2] ECLAC, The social challenge in the face of Covid19, 12 May, 2020.

[3] ILO, Covid-19 and the labour world

https://www.ilo.org/wcmsp5/gro...

[4] This is the case of Bolivia, Costa Rica, Ecuador, Argentina, El Salvador and Brazil https://www.latindadd.org/2019...