Central America: Seeking resilient growth and social cohesion after shocks
Written by Metdigi Hadji-Vaskov and Joyce Wong
July 5, 2022
Big shocks are not uncommon in Central America. The region was once one of the most volatile regions in the world, and was the scene of civil war and political turmoil. Recently, in addition to the coronavirus pandemic, the country has also been hit by natural disasters. After each shock, the region has managed to recover in search of a new beginning. Policymakers now have a unique opportunity to implement reforms that put regional economies on a path to more resilient and inclusive growth, while meeting the critical needs of their citizens.
fragile recovery
Since the outbreak of the pandemic, the economy of Central America, Panama and the Dominican Republic (CAPDR) has become one of the strongest in Latin America. By 2021, all regions except Panama exceeded pre-pandemic production levels.
This strong recovery was in part the result of authorities’ swift, comprehensive, and often unprecedented policy responses. These include historic reductions in monetary policy rates to support economic activity and sharp increases in social support and health spending. External factors such as the economic recovery in the United States, backed by the region’s relative openness and dependence on remittances, also contributed to the recovery.
While battling the pandemic, the region was also hit by hurricanes Eta and Iota, a reminder of its vulnerability to climate change. Once again, disaster-stricken countries responded with prompt assistance to their people and began recovery.
Just as the recovery was taking hold in 2022, the region is now feeling the effects of the global impact of the war in Ukraine, specifically rising fuel and food prices. Authorities responded again with spending and tax measures to safeguard the nascent recovery and support the population, especially the most vulnerable.
These multiple shocks are projected to leave a scar on the region’s GDP levels. The negative impact on GDP is smaller than expected for 2021, but larger than in developed countries.
test of resilience
The region’s economic outlook is currently subject to unusually high levels of uncertainty. A potential confluence of adverse global factors could once again test economic resilience, while policymakers have little room for maneuver in the face of rising debt and other factors.
These factors include: Further fluctuations in primary product prices as the region remains highly dependent on fuel imports. slowing growth in our trading partners, including the United States; Tightening financing conditions due to accelerating global and domestic interest rate increases. and further curbing the inflow of remittances, which is the lifeblood of some economies.
Opportunity for a new, stronger beginning
The region now has a unique opportunity to refocus on a series of important reforms to improve social conditions and reverse the worsening of existing problems such as persistently high unemployment, poverty and inequality. All of these are driving migration.
Policymakers need to increase labor market flexibility, create job opportunities especially for women and young people most affected by the crisis, invest in climate-resilient infrastructure, and promote digitalization in both the public and private sectors. It is necessary to focus on promoting the development plan. This will further increase the competitiveness of the region.
This process will take time, making it all the more important to put in place strong domestic policies to build resilience before the next shock knocks on the door.
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Metdigi Hadji-Baskov Regional Permanent Representative for Central America, Panama and the Dominican Republic.
Joyce Wong I am the head of the mission from Honduras.