IMF to Latin America: tighten your belts

(Reuters) – After central banks across Latin America and the Caribbean raised rates to battle inflation, the International Monetary Fund is now pointing at less spending from governments to help slow down price pressures – while reminding the region’s rich to pay more taxes.

“Fiscal policy can help monetary policy in reducing demand pressures,” the IMF said in a blog post on its outlook for the region’s economy.

The fund said the fall in headline inflation in the region’s largest economies to 7% in March from 10% in mid-2022 is mainly due to declines in commodity prices, while core inflation, which excludes food and energy, remains high.

Employment is above pre-pandemic levels, output is at or above potential, and short-term inflation expectations exceed central banks’ targets, the fund said.

“Strong domestic demand, rapid wage increases, and broad-based price pressures all point to a risk that inflation in the region could remain unacceptably high.”

Cool the labor market

Regional government spending has fallen from its pandemic levels and is at a point the fund calls “neutral,” but says it is time for “a more contractionary fiscal stance” that would help slow domestic demand and take pressure off high interest rates.

“Policies should be aimed at restraining demand to bring it back into line with potential output. This will inevitably require cooling the labor market.”

However, with softer jobs the need for social spending will remain high, the IMF said. Progressive tax laws and efficient governing can help.

“Rebalancing policy will not be easy,” the fund said, adding that there are “serious distributional and social equity issues to contend with. Enacting tax policies that require the wealthy to pay their fair share should be part of the solution.”

Spending better means spending with more efficiency and transparency, key points in a region often plagued by corruption.

“There is important scope to reduce inefficiencies in public spending, and people are more likely to embrace more prudent public finances if services are provided with greater efficiency,” said the IMF.

“Being good stewards of taxpayer resources could also help reverse the erosion of trust in government that many countries have suffered over the last several years.”

LatAm & Caribbean GDP growth, projections https://www.reuters.com/graphics/IMF-LATAM/EMBARGOED/xmpjkjeorvr/chart.png

(Reporting by Rodrigo Campos; Editing by Daniel Wallis)