Countries should improve efficiency of spending and tax revenue collection – IDB says in new report  

Feb 02, 2023 News

Reducing debt levels…

Kaieteur News – With Latin America and Caribbean (LAC) countries debt level standing at a whopping US$5.8 trillion – the Inter-American Development Bank (IDB) in its new report urged the region to improve efficiency when spending and improve their revenue tax collection.

Guyana’s Finance Minister, Dr. Ashni Singh announced two weeks ago that the country’s total public debt stood at US$3,654.9M, an increase by 16.9 percent from last year. This publication had reported that almost all of its recently announced public infrastructural projects government has been borrowing to finance them, despite earning over US$1B in the oil account for last year.

In its report titled, ‘Dealing with Debt – Less Risk for More Growth in the Latin America and the Caribbean’ the IDB urged governments to bring their debts down to more prudent levels – while adding that the best way for a country to reduce debt levels is through fiscal consolidation which depends critically on each country’s specific characteristics.

“In particular, the quality of public investment can be enhanced at all stages of project cycles, as can the efficiency and targeting of transfer payments,” the report stated.

Kaieteur News had highlighted that, “Given the dangers of excessive debt, the current situation in Latin America and the Caribbean is worrisome.”

IDB said public debt serves a critical role for countries to pursue public investment projects, implement countercyclical policies, and provide support to economies in the face of negative shocks. However, the IDB warned that if public debt becomes too large or is not managed with sufficient caution, interest costs may balloon, growth prospects may suffer, and in the limit, a costly debt crisis may be provoked.

It was stated too that public debt had increased before the pandemic, with sudden debt spikes accounting for much of the increase. According to the IDB, “that spikes occurred largely during times of stress, fueled by a combination of low growth, high fiscal deficits, ballooning interest payments, currency depreciations, and significant off-budget and unfunded liabilities.”

“This pattern of debt increases in the region points to the need for stronger fiscal institutions to establish credible and sustainable medium-term objectives to limit debt spikes, and where they are necessary, to promote periods of debt reduction…” the IDB said.

According to the report, governments can bring down their debt levels by improving spending efficiency, expanding the tax base, and seeking wider reforms to enhance fiscal balances and boost growth.

The IDB said that there are many reasons why public debt levels should be lower than they currently are, highlighting that there are several ways to reduce that debt.

“An analysis of past debt reduction episodes around the world points to countries that have reduced debt-to-GDP ratios by increasing growth and improving fiscal balances,” it was stated.

Notably, it was disclosed that the region has more cases in which significant debt reductions have been achieved through low real interest rates or higher inflation, although they have typically not been as smooth or resulted in as good growth performance.

• borrowing, Caribbean, GDP, IDB, loans