Fiscal Resilience in a Post-Pandemic World: This time is not different.

The economies of emerging markets (EMEs) have been adversely affected by the implementation of large expenditure packages and decreased revenue collection, creating a necessity to reconstruct their fiscal rooms to withstand potential future shocks. A balanced approach is deemed necessary to support economic recovery without jeopardizing fiscal consolidation. The enhancement of fiscal institutions and the improvement of budgetary frameworks are crucial components of this approach, as they serve to augment transparency, accountability, and efficiency in fiscal management. Additionally, it is imperative to bolster domestic financial markets, prioritize structural reforms that foster productivity and competitiveness, and boost international cooperation to provide debt relief and financing.

The prevailing circumstances of escalating inflation, fluctuating commodity prices, and mounting interest rates have raised apprehensions regarding the sustainability of debt and fiscal policies. Emerging market economies, in particular, are more susceptible to global financial conditions. The confluence of high inflation and rising global interest rates may trigger capital outflows, currency depreciation, and economic instability, compelling these nations to raise their own interest rates, thereby exacerbating the public debt burden and necessitating fiscal austerity measures.

High inflation contributed to reducing fiscal debt in many countries, including Latin American economies. However, the potential short-term benefits emerging from inflation surprises on the public debt-to-GDP ratio are more than offset in the medium and long run in all sorts of economies worldwide. Then, fiscal and monetary policies should coordinate to control inflation and achieve debt sustainability. It is key to preserve the credibility of the macroeconomic and financial policies under the adoption of credible fiscal policy frameworks.

The instability of commodity prices is a serious source of concern for countries that rely on the exportation of these goods. Fluctuations in commodity prices can cause significant variations in export revenues and fiscal balances. This is particularly evident in net commodity-exporting countries, where a decline in commodity prices can lead to a reduction in government revenues. As a result, such countries may need to adjust their fiscal policies, either by reducing expenditures, increasing alternative forms of revenue, or escalating borrowing. These measures, however, can contribute to a rise in public debt levels and precipitate fiscal concerns.

Within the Latin America region, nations are confronted with the arduous task of mitigating fiscal deficits and debt levels, while simultaneously investing in infrastructure and social initiatives, and adapting to the consequences of climate change. To successfully surmount these challenges, Latin American countries must strive to strike a delicate balance between bolstering economic growth and diminishing fiscal deficits and debt levels. This may necessitate the expansion of the tax base, optimizing public services, and directing investments toward infrastructure and social programs that stimulate economic growth and alleviate poverty.

A prevalent issue in the Latin American region is the high level of labor informality (Figure 2), which poses significant challenges to the fiscal consolidation and sustainability of public debt by decreasing tax revenues and undermining social security contributions. To alleviate these effects, it is advisable for governments to streamline tax systems and reduce administrative burdens to encourage formalization. In addition, the implementation of social protection policies that do not depend on formal employment may provide a safety net for informal workers and simultaneously diminish the incentives for informality.