WASHINGTON, United States (CMC) — The International Monetary Fund (IMF) Tuesday said that the war in Ukraine is shaking the global economy and raising uncertainty about the outlook for Latin America and the Caribbean.

It said that the impact is being felt through higher inflation that is affecting real incomes, especially of the most vulnerable, and that policymakers are reacting to this challenge by tightening monetary policy and implementing measures to soften the blow on the most vulnerable and contain the risks of social unrest.

“But there are other risks looming. A possible escalation of the war could eventually lead to global financial distress and tighter financial conditions for the region. In addition, the ongoing tightening of monetary policy in the United States, as the Federal Reserve takes a more hawkish stance, could eventually affect global financial conditions,” said the IMF Director for Western Hemisphere Department, Ilan Goldfajn.

According to the Washington-based financial institution, Caribbean countries last year recorded economic growth of between 2.8 and 4.7 per cent.

The IMF said tourism-dependent Caribbean countries like Antigua and Barbuda, the Bahamas, Belize, Dominica, Grenada, Haiti, Jamaica, St Kitts-Nevis, St Lucia and St Vincent and the Grenadines are predicted to record 3.2 per cent growth this year, declining slightly to 3.1 per cent the following year.

It said that in the case of countries like Guyana, Suriname and Trinidad and Tobago, classified as Caribbean commodity exporters, the economic growth will range from 20.2 per cent this year, dropping to 16.4 per cent next year.

Goldfajn told reporters that higher global and domestic financing costs can accelerate capital outflows and represent a challenge for the region, given large public and external financing needs in some countries and the limited resources to finance investment in the region.

“Any greater growth deceleration in China, because of the pandemic or other reasons, could also have an impact on key export prices and trade in the region,” he said, adding that all these risks cloud growth prospects for the region and require policy action.

Goldfajn told reporters that poverty and inequality remain key concerns in Latin America and the Caribbean given that the increase in inflation has an uneven impact on the population.

He said the most vulnerable groups in the region are being hit hard by the increase in basic food and energy prices, while still struggling to recover from the economic impact of the pandemic.

“Indeed, since the war began, several countries in the region have acted to contain the effects of rising prices on vulnerable groups—ranging from tax and import tariff reductions to price caps or social transfers,” the IMF official said, noting that close to 40 per cent of countries have introduced new measures, mostly on the tax side, with an estimated average fiscal cost equal to 0.3 per cent of gross domestic product for this year.

“To ensure social cohesion and reduce the risk of social unrest, governments should provide targeted and temporary support to low-income and vulnerable households, while allowing domestic prices to adjust to international prices.

“This would help vulnerable groups and contain fiscal costs, while also incentivising production and restraining consumption. In countries with well-developed social safety nets, access could be expanded to temporarily cover larger groups of the population.”

Goldfajn said where safety nets are not well developed, governments can implement temporary mechanisms to smooth the pass-through of international price surges to domestic prices.

He said although this strategy would protect households from the volatility of commodity prices, it may also have a significant financial cost while distorting price incentives for consumers and producers.

“Countries benefiting from improvements in their terms of trade—a measure of prices for a country’s exports relative to its imports—may find it easier to finance these new measures. However, any additional fiscal space should be used wisely given the unusually high risks surrounding the global recovery and the evolution of commodity prices, as well as the increasing costs for government financing.”

Goldfajn said with public debt-to-GDP (gross domestic product) ratios above pre-pandemic levels and borrowing costs rising amid higher local and global interest rates, countries will need to ensure the sustainability of public finances to help preserve credibility and rebuild fiscal space. However, it will be equally important to implement measures that protect the most vulnerable.

“This will require a strategy that focuses on inclusive consolidation. Spending on social programs, health, education, and public investment should be protected, while implementing tax reforms, such as strengthening personal income taxes that will bolster growth in an inclusive manner and help countries maintain fiscal sustainability,” said Goldfajn.