EFE, Washington
The International Monetary Fund (IMF) believes that Latin American countries should implement stricter fiscal policies, such as raising taxes on the wealthy, to curb high inflation and thus reduce the influence of central banks in their monetary policy.
"A more contractionary fiscal stance would help curb domestic demand, allowing interest rates to fall sooner," the institution said today in a regional note published on the occasion of the Fund's spring meetings with the World Bank, which are being held in Washington.
The council is in line with the IMF's message during the meetings, in which it has called for a tightening of fiscal policy as a way to complement monetary policy, at a time when growth is being hampered by high interest rates and global uncertainty.
According to Nigel Chalk, deputy director of the Western Hemisphere Department at the World Bank, persistent inflation likely means that "interest rates will have to remain elevated for longer than we initially thought.".
However, thanks to the fact that many central banks, such as those of Mexico and Brazil, acted very quickly against rising prices, inflation expectations have remained well anchored, "something unusual in previous cycles," the expert said in an interview with EFE.
According to Chalk, this has also helped to keep exchange rates in the region strong, in a context of dollar appreciation due to the high interest rate policy of the US Federal Reserve (Fed), something that has also contributed to containing the rise in inflation.
However, if the rise in consumer prices becomes entrenched – if food and product prices remain high – as seems to be happening, the economic slowdown caused by a restrictive monetary policy could end up causing weaknesses in the financial sector and affecting household consumption.
The IMF expects interest rates to remain high in Latin America for much of this year and, in some countries, even into 2024, while inflation may not fall to the authorities' target until early 2025.
Raise taxes on the rich
To avoid the disproportionate impact of inflation on the most disadvantaged people, the IMF proposes increasing the tax contributions of the wealthiest.
"Implementing tax policies that force the wealthy to pay their proportionate share should be part of the solution ," the organization said in its regional statement.
In this way, the Fund argues, a contractionary fiscal policy can be implemented without reducing social spending to combat inequality, a persistent problem in most countries of the region.
The recommendation is key at a time of global and regional slowdown: according to its latest outlook, the IMF believes that Latin America will grow by only 1.6% this year, after registering unexpected growth of 4% last year driven mainly by the increase in commodity prices.
At this point, Chalk warned that the good figures for 2022 are mainly due to an increase in demand, but not in supply, and argued that improving productivity will be one of the most important challenges the region will have to face in the future.
The expert considered that there are many historical reasons that explain the region's productivity problems:
- Low investment in infrastructure
- Quality of the education system
- Institutional corruption
He explained that these are very complicated challenges to solve since they require "money and fiscal resources".
In particular, Chalk referred to foreign investment, which, except in the case of Mexico, has been progressively declining, and considered that a regulatory environment that gives incentives to international participation "would boost the long-term growth prospects" of Latin America.
