Latin American and Caribbean (LAC) nations face the challenge of financing their ambitious development agendas. Today's 2024 edition of the Latin American Economic Outlook (LEO) emphasizes the need for these countries to enhance tax collection and spending, improve public debt management, and mobilize more private resources. The region's sustainable financing gap, estimated at USD 99 billion annually, can be bridged through better coordination between private and public actors, with the support of international partners.
Unlocking the Potential of LAC's Finance for Sustainable Development
Improve Tax Levying
In most LAC economies, tax revenues are relatively low, averaging 21.5% of GDP in 2022 compared to the OECD's 34%. Adjusting the tax structure and leveraging existing taxes can help reduce inequalities, support the green transition, improve health outcomes, and foster entrepreneurship. For instance, in Brazil, a reevaluation of tax policies led to an increase in tax revenues, which in turn funded important social programs. In Chile, a more targeted tax approach has contributed to a more stable fiscal environment and the promotion of economic growth.Optimize Budget Allocation
Public spending in LAC is concentrated in current expenditure like wages and transfers (82% in 2023), which is short-term focused and inefficiently allocated. By reallocating funds and increasing spending efficiency, countries can free up additional resources. For example, in Colombia, a careful review of budget allocations led to a significant increase in spending on infrastructure, which has had a positive impact on economic development. In Peru, optimizing budget allocation has allowed for a better focus on key sectors such as education and healthcare.Improve Debt Management
LAC countries have seen an increase in debt service, from 9.8% of tax revenue in 2012 to 12.2% in 2022. Robust fiscal frameworks are crucial to maintain fiscal sustainability. In Argentina, for instance, implementing stricter debt management policies has helped stabilize the country's finances and reduce the risk of default. In Mexico, a comprehensive debt management strategy has enabled the country to manage its debt more effectively and allocate resources more efficiently.Deepen Financial Markets
Financial systems in LAC lack depth, with domestic credit to the private sector reaching only 50% of GDP. Many vulnerable groups, including women, are excluded from the financial system. In Brazil, efforts to deepen financial markets have led to an increase in access to credit for small and medium-sized enterprises, promoting economic growth and job creation. In Costa Rica, initiatives to encourage innovation in the financial sector have attracted more private resources towards development goals.Encourage Production Transformation
To achieve sustainable growth and promote competitive sectors, LAC countries need to increase the presence of private issuers and enhance capital market liquidity. Currently, debt markets in the region are largely public-sector driven. In Venezuela, policies to expand institutional investor participation and update regulatory frameworks have led to a more diversified and vibrant capital market. In Ecuador, enhancing financial literacy and strengthening regional integration have played a crucial role in attracting private investment.Role of Development Finance Institutions (DFIs)
DFIs play a key role in LAC's developing financial market. 34% of DFIs have a specific mandate to support the financial inclusion of micro-, small- and medium-sized enterprises, but only 19% of their proposed financial instruments address the green transition, gender equality, and digital transformation or innovation. In Uruguay, DFIs have been instrumental in providing financing to sustainable projects, promoting economic development and environmental sustainability.International Cooperation
International cooperation is essential for mobilizing new resources. The EU-LAC Global Gateway Investment Agenda is a prime example, mobilizing funding through public-private partnerships to address infrastructure needs while creating local added value and promoting growth, jobs, and social cohesion. In Panama, such cooperation has led to significant investments in infrastructure projects, improving connectivity and economic opportunities.Financing Instruments
Financing instruments like green, social, and sustainability-linked bonds are becoming increasingly attractive. They have increased from 9.3% of total LAC bond issuance in international markets in 2020 to almost 35% in 2023. In Brazil, the use of these bonds has funded important environmental and social projects, demonstrating their potential. In Colombia, catastrophe bonds and debt-for-nature swaps have mobilized public and private investment in areas affected by natural disasters.Finally, LAC countries should coordinate to present their regional perspective at the UN's Fourth International Conference on Financing for Development (to be held in mid-2025 in Sevilla), ensuring that their needs and priorities are heard on the global stage.More information about the report: https://www.oecd.org/en/publications/latin-american-economic-outlook-2024_c437947f-en.html
