As per the released 2024 edition of the Latin American Economic Outlook (LEO): Financing Sustainable Development, American and Caribbean (LAC) countries should enhance tax collection and expenditure, upgrade public debt management, and mobilise more private resources so as to finance their aspiring development agendas.
The 17th edition of the report argues that LAC’s sustainable financing gap – estimated at USD 99 billion annually – can be clubbed if private and public actors enhance co-ordination, with the assistance of their international partners. The region’s challenging socio-economic context request for an ambitious set of reforms. Productivity growth remains fragile: average labour productivity added up to just 33% of OECD levels in 2023, while poverty accounted for 27.3% of the region’s overall population in 2023, its lowest level over the past two decades. Intense poverty has remained persistently high, affecting one out of ten (10.6%) Latin Americans and Caribbeans.
After the COVID-19 outbreak had reduced the region’s fiscal space thus many nations are going through a phase of fiscal consolidation and maintain a tight monetary stance to keep inflation expectations stable. Expansionary economic strategies that boost social goals and aggregate demand are limited in this situation.
In order to mobilize resources in support of LAC’s sustainable development, the report identifies the following priorities:
Enhance the way taxes are collected. Tax collections are low in the majority of LAC economies, averaging 21.5% of GDP in 2022 when compared to 34% in the OECD. Moreover, adjusting tax structures or making better use of already-existing taxes could promote entrepreneurship, encourage the green transition, lower inequality, and enhance health outcomes.
To free up more resources, optimise budget allocation and boost spending effectiveness. Public spending is mostly focused on short-term, inefficiently allocated current expenses, such as wages and transfers (82% in 2023).
To preserve fiscal sustainability, strengthen debt management through sound fiscal frameworks. The percentage of tax revenue used for debt payment in LAC countries hiked from 9.8% in 2012 to 12.2% in 2022. Interest payments have risen to up to twice the amount spent on education, three times the amount spent on healthcare, and four times the amount spent on capital expenditures in a number of countries over the last ten years.
Expand financial markets and promote creativity to direct more private funds toward development objectives. Given that domestic lending to the private sector accounts for 50% of GDP, financial systems in LAC are shallow. Women and other vulnerable populations are still excluded from financial systems. In 2020, only 2.3% of informal households had access to housing loans, whereas over 15% of formal households did.
Through the expansion of the number of private issuers and improving capital market liquidity, one may promote production transformation to attain sustainable growth and the advancement of competitive sectors. With 81% of local issuances from 2015 to 2023 coming from the public sector, the LAC region’s debt markets are currently primarily driven by the public sector. Policies must attempt to increase institutional investor participation, modify regulatory frameworks, strengthen regional integration and enhance financial literacy in order to address this concentration.
In a still-emerging financial industry, Development Finance Institutions (DFIs) are vital. The financial inclusion of micro, small, and medium-sized businesses is a stated responsibility for 34% of DFIs; yet, only 19% of the financial instruments they offer address gender equality, the green transition, and digital transformation or innovation.
In order to mobilize additional resources, international cooperation is essential. Among these is the EU-LAC Global Gateway Investment Agenda, which uses public-private partnerships to raise money for infrastructure needs while fostering social cohesion, employment, and growth locally.
From 9.3% of all LAC bonds issued in international markets in 2020 to nearly 35% in 2023, financing instruments such as green, social, and sustainability-linked bonds remain an alluring strategy. Natural disaster provisions, debt-for-nature swaps, and catastrophe bonds can also mobilize private and public investment where it is most needed. Greenwashing should be avoided by establishing standardized standards and trustworthy monitoring and oversight systems for these tools.
Additionally, the region should work together to provide its own regional viewpoint at the UN’s Fourth International Conference on Financing for Development, which will take place in Sevilla by mid-2025.
The Latin American Economic Outlook is collectively produced by the Development Centre of the Organisation for Economic Co-operation and Development (OECD), the United Nations Economic Commission for Latin America and the Caribbean (UN-ECLAC), the CAF-Development Bank of Latin America and the Caribbean, and the European Commission.
