Chief economist for Latin America and the Caribbean, Carlos Végh, has deemed the region’s fiscal policy as precarious with an urgent need for further adjustment, as growth in China and the United States continue to trend upwards.

Végh gave the prescription Wednesday in a World Bank report titled ‘Growth vs Inflation, Latin America and the Caribbean’s Difficult Balance’. He said that since the international environment will be relatively stable in the near future, the region, above all Jamaica with a debt to GDP ratio of over 80 per cent, will now have to strengthen its own growth sources by means of structural reforms and increasing international trade both inside and outside the region.

Already the island is undergoing a number of reforms under existing arrangements with the International Monetary Fund, but Jamaica could be in need of further reforms to stimulate the economy while guarding against further depreciation of the local currency and increased inflation.

Végh said that while growth for Latin America and the Caribbean has rebounded to 1.2 per cent for this year; commodity prices, growth rate in the United States and China, as well as the measurement of global liquidity in the international financial market will now force the region to deepen structural reforms such as educational, labour, pensions, and infrastructure development if it truly wishes to see growth beyond 1.2 per cent.

“Let’s remember that for almost seven years we have been growing at a rate of 5 to 6 per cent and now we will have to depend much more on ourselves,” he said.

“If you look at the growth of the US as well as the growth of China, then you will indeed agree that it is only reasonable to conclude that in the immediate future these external factors may be relatively stable, so they may not be helping us, but they will not be detrimental either and this has an important consequence. As opposed to what used to happen during the golden decade 2003-2013, where growth was perhaps due especially to external factors, the fact that these will now be stable means that the region will have to strengthen to find its own sources of growth,” he said.

The chief economist, who noted that fiscal adjustment across the region is inevitable, said the change has to be gradual since the region is already going through times of relatively low growth, and it is not necessary to conduct a fiscal adjustment that results in a shock.

Of the region’s economies, Végh said 28 of 32 are expected to have a fiscal deficit in 2017, reflecting a weak situation and that will continue to increase public debt. He pointed out that the average public debt in Latin America and the Caribbean stands at a worrisome 58.7 per cent, with six countries that have public debt to GDP ratio above 80 per cent, Jamaica being the worst.

“That means that the fiscal situation is rather precarious. It also means that, among other things, there is a fiscal space that is quite limited. We would say zero, which means that there is no leeway for any form of fiscal policy which is anti-cyclical in nature. So the issue having to do with the monetary policy becomes paramount, which is the main approach in the report,” he said.

He further recommended that the central banks of Latin America and the Caribbean follow Chile, Brazil and Peru in lowering interest rates in order to stabilise and stimulate the economy.

“And if it is necessary to do this after stabilising the rate of exchange and the inflation, that would be very good,” he continued.

Végh, in questioning whether central banks are capable of bringing down the interest rates of monetary policy to stimulate the economy without threatening depreciation of local currencies and inflation, noted that they have two options.

“They can increase the monetary interest rate to defend their exchange rate and to combat inflation, even though this may actually worsen the recessionary conditions. This is what we would call a pro-cyclical monetary policy,” he said.

“Or the central banks could opt to lower the monetary policy rate to stimulate economic activity. But by so doing they run the risk of that drop in interest rates leading to a faster depreciation and inflationary acceleration. So economic agents may fear that this may lead to financial instability in the economy, and if that is the case, that could cause an even worse depression and also lead to capital, more depreciation and consistently the economy could easily fall into a vicious cycle,” he reasoned.