Central America as Seen by the IMF

"The ongoing economic recovery in the United States and persistence of relatively low oil prices will provide favorable tailwinds to the region.Because of supply constraints, the region is expected to maintain a moderate pace of growth in coming years."

Friday, July 24, 2015

From the press release by IMF:

Central bank governors, finance ministers, and banking superintendents of Central America, Panama, and the Dominican Republic, and senior IMF officials met in El Salvador on July 23-24 to review the economic outlook for the region and strategies to strengthen policy frameworks and raise inclusive growth. The regional conference saw the participation of the President of El Salvador, Salvador Sánchez-Cerén; Governor of the Bank of México, Agustín Carstens; Director of the Netherlands Bureau of Economic Policy Analysis, Laura van Geest; and former Finance Minister of Perú, Luis Carranza.

A the conclusion of the conference, the following statement was released by the Deputy Managing Director of the IMF, Mitsuhiro Furusawa; the President of the Central American Monetary Council, Marlon Tábora Muñoz; the President of the Central American Council of Finance Ministers, Carlos Cáceres; the President of the Central American Council of Financial Sector Superintendents, Ricardo Fernández; and the President of the Financial Sector Superintendent, Ricardo Perdomo and the President of the Central Bank of El Salvador, Oscar Cabrera, hosts of the conference.
“The ongoing economic recovery in the United States and persistence of relatively low oil prices will provide favorable tailwinds to the region. Because of supply constraints, the region is expected to maintain a moderate pace of growth in coming years, which will be insufficient to deliver desired social progress. Low oil prices will offer considerable relief to the external sector in most countries and will help keep inflation low. In light of this economic outlook, participants agreed that the region needs to take advantage of the improved external conditions to lift potential growth, ease inequality gaps, and strengthen the resilience to adverse shocks. These goals will require the adoption of far-reaching structural reforms and stronger policy frameworks.

“The region has further consolidated macroeconomic and financial stability in recent years, while countries have been operating at near capacity. Building on this, participants concurred that countries need to remove bottlenecks and address competitiveness gaps to boost economic opportunities and growth potential. Therefore, the policy agenda going forward should contain reforms aimed at raising investment and boosting productivity to the levels observed in more dynamic economies. To this end, participants concurred that countries should improve the business climate, strengthen security and governance, modernize infrastructure, and invest in human capital, which will in turn require adequate levels of government revenue and better prioritization of public expenditure. To tap additional sources of growth, it is also necessary to deepen regional integration, diversify the exportable sector, and promote the use of more advanced technology in manufacturing processes.

“Discussions also centered on the important role fiscal responsibility initiatives could play in helping the region strengthen its fiscal policy frameworks. As a result of the global financial crisis and country-specific developments, several countries in the region are facing rising public debt burdens while often lacking resources for key spending. Besides stronger fiscal institutions, those countries need to close fiscal sustainability gaps, create space for priority social and investment projects, and allow for countercyclical fiscal responses. Drawing on the lessons from Peru and the Netherlands, participants discussed the benefits of fiscal consolidation rules, including best practices for credible fiscal institutions and the role of a communication strategy in building a broad public consensus for continued fiscal responsibility. There was agreement that fiscal adjustment in the region should be carefully calibrated, so as to reduce any negative effects on growth and jobs.

“The normalization of monetary conditions in the United States may lead to new bouts of volatility in global financial markets. Although the region is fairly well positioned to manage these risks, participants felt that more could be done to reinforce defenses. Based on the experience of Mexico, participants emphasized that the region needs to keep strong foreign reserve cushions and solid debt structures, while greater exchange rate flexibility could be useful to safeguard against adverse external shocks. Moreover, growing financial integration within and outside the region provides benefits but also poses new risks. Although liquidity cushions and capitalization remain adequate in the banking systems, participants supported policies that further improve cross-border consolidated supervision, promote the use of macro-prudential tools to hedge against interconnectivity risks, and upgrade crisis prevention plans at the regional level.

“Participants expressed appreciation for the support provided by the IMF to the conference over the years, which is an integral part of the policy dialogue between the region and the IMF. Lastly, participants thanked the Salvadoran authorities for their hospitality and support for the success of the conference, and Guatemala for offering to host the next conference.”

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