WASHINGTON, United States (CMC) — Economic growth in Latin America and the Caribbean has returned to more stable historical averages since the coronavirus (COVID-19) pandemic, according to a new report issued by the Inter-American Development Bank (IDB).

But the IDB acknowledges that amid global shifts, the region needs to embrace a series of reforms to seize growth opportunities and chart a course toward greater prosperity for their citizens.

According to the IDB’s new macroeconomic report, the region grew two per cent in 2024, exceeding initial forecasts of 1.7 per cent, and is expected to grow 2.3 per cent in 2025.

The Regional Opportunities Amid Global Shifts report projected growth rates are insufficient to address the region’s pressing socioeconomic needs, including reducing poverty and inequality.

It said countries in the region should therefore focus on boosting productivity while reducing socioeconomic inequalities and maintaining macroeconomic stability.

The report highlights a series of growth opportunities, including capitalising on the realignment of global supply chains, enhancing intraregional integration, and reducing labour informality, while efficiently managing fiscal and monetary policy.

“Latin America and the Caribbean is at a pivotal moment to tap into unprecedented opportunities. Since the COVID-19 pandemic, the region has achieved a series of positive outcomes.

“Growth rates have returned to long-term averages, inflation has largely been contained, and many countries have taken steps toward fiscal consolidation. However, substantial risks remain, such as global trade fragmentation, volatility in financial markets, and uncertainty surrounding the global economy,” said IDB’s Chief Economist and Economic Counsellor of the Research Department, Eric Parrado.

According to the report, the median annual inflation rate in the region eased to 3.8 per cent by the end of 2024 after peaking at 9.8 per cent in July 2022. However, domestic factors, such as fiscal uncertainties and robust economic activity in some countries, continue to put pressure on prices.

The report analyses how policymakers can balance monetary easing with inflation risks while ensuring financial conditions remain supportive of growth.

Among untapped economic opportunities, the report highlights that strengthening intraregional integration through trade and foreign direct investment is critical to increasing productivity, fostering industrial diversification and driving growth in Latin America and the Caribbean.

It said despite shared economic interests, intraregional trade accounts for only 15 per cent of the region’s total trade, compared to 55 per cent in Asia and 68 per cent in Europe. The shifting global dynamics have created opportunities for Latin America and the Caribbean to attract trade and investment flows, underscoring the urgency of integrating the region more deeply into global value chains.

The report also analyses how labour formalisation can favourably impact gross domestic product (GDP) due to lower productivity and limited access to financing, while informality erodes the tax base and weakens public finances. A formalisation process could increase GDP significantly in some countries through gains in productivity, better resource allocation and enhanced fiscal accounts.

The report highlights how countries can close fiscal gaps while supporting sustainable growth. Under baseline and stress scenarios, average public debt in Latin America and the Caribbean will reach between 57 and 63 per cent of GDP by 2027.

In a 2023 report, the IDB concluded the region should reduce public debt ratios to a prudent range of 46-55 per cent of GDP. In response, governments can strengthen fiscal positions by addressing inefficiencies in public spending, particularly in procurement and investment, transfers and salaries.

The inefficiencies in public spending across a set of 15 countries increased slightly from 4.4 per cent of GDP in 2015-2016 to 4.6 per cent in 2022, mainly driven by rising energy subsidy leakages. Reducing these inefficiencies can drive a 1.8 percentage point increase in GDP growth, as efficiency reforms strengthen fiscal positions and reduce debt burdens.

On the external account and financial markets front, the report highlights the region’s greater resilience in both reducing its vulnerability to sudden stops and strengthening its ability to withstand them.

This is evidenced by the return of spreads to pre-pandemic levels despite higher global interest rates. Amid a shifting global economic landscape, countries should remain committed to closing fiscal and external gaps, building reserves and managing risks to successfully navigate the complex global economic landscape.