How to entrench hard-won gains, increase resilience to shocks, and improve growth performance to reduce poverty? As Central America moves forward in regaining macroeconomic stability, these are the challenges. This study analyzes Central America’s real, fiscal, monetary, and financial sector policies at the regional level, starting with a review of growth performance and the macroeconomic implications of remittances. It then looks at the sustainability of pension systems, financial system development, sovereign debt vulnerabilities, and ways to sustain progress in reducing inflation by strengthening the credibility of central banks.
Central America has made substantial progress in regaining macroeconomic stability and has continued to integrate further both globally and at the regional level.2 The challenge now is how to entrench these gains, improve growth performance to significantly reduce poverty, and reduce vulnerabilities, including those that are associated with increased integration. This paper addresses some of these important issues. After reviewing recent developments, this chapter provides an overview of key policy issues facing Central America: economic growth, fiscal issues related to pension reform and sovereign debt structures, the development of capital markets, and monetary policy. It also briefly discusses the progress that has been made with integration and regional policy coordination.3 The subsequent chapters analyze these key issues in more depth.
José Brambila Macías, Mr. Guy M Meredith, and Ivanna Vladkova Hollar
During the period of reforms that began in the early 1990s, economic growth in Central America recovered from the poor performance of the 1980s.1 Yet, in spite of the region achieving a welcome degree of macroeconomic stability, growth in the 1990s still fell short of the record achieved in the 1960s and 1970s. It also fell short of more dynamic emerging market countries, notably in Asia. Despite the more recent stronger performance, there continue to be concerns about the region’s ability to grow at a pace that will significantly raise living standards and reduce poverty.2 Underscoring this challenge, even while the incidence of poverty edged down in the region during the 1990s, it remained well above that of Latin America as a whole at the end of the decade (Figure 2.1).
Public pension systems are coming under increasing financial pressure around the world. As populations age, the number of pensioners is rising relative to the number of workers in many countries, resulting in increasing pension system deficits as spending on benefits rises relative to contribution revenue.
Raising living standards continues to be the main challenge facing Guatemala, as a matter of economic success and social cohesion. This paper discusses the spending, financing, and delivery capacity aspects of a viable development strategy for Guatemala couched within the United Nations Sustainable Development Goals (SDGs) agenda. Overall, Guatemala faces additional spending of about 8½ percent of GDP in 2030 to attain health, education, and roads, water, and sanitation infrastructure SDGs. While substantial, these cost estimates are commensurate with a well-defined financing strategy encompassing continuing tax administration efforts, broad-based tax reform, scaled-up private sector participation, and greater spending efficiency. Improving delivery capacities is also essential to secure access of those public goods to all Guatemalans, irrespective of their place of residence, ethnic group, or ability to pay.
For the latest thinking about the international financial system, monetary policy, economic development, poverty reduction, and other critical issues, subscribe to Finance & Development (F&D). This lively quarterly magazine brings you in-depth analyses of these and other subjects by the IMF’s own staff as well as by prominent international experts. Articles are written for lay readers who want to enrich their understanding of the workings of the global economy and the policies and activities of the IMF.
Since the Asian crises of the late 1990s, researchers and policymakers have put more emphasis on countries’ balance sheets to identify sources of vulnerability. This has led several authors to advocate a “holistic” balance sheet approach as a complement to other surveillance practices to closely monitor these vulnerabilities and sectoral interlinkages.2 A fragile balance sheet of a single sector of the economy might be enough to plunge a country into crisis due to the exposure of other sectors to that single sector. In Central America, assessing the vulnerabilities of the sovereign is of particular importance since the sovereign is the most important external debtor, with implications for the economy as a whole.3 This chapter analyzes Central America’s sovereign debt structures, considers how they evolved over time, and assesses the vulnerabilities implied by them.4
The development of public debt markets in Central America is critically important to the overall development of capital markets. As with many emerging markets, the Central American capital markets are somewhat underdeveloped. Problems in public debt management and underdevelopment of capital markets are related. The underdevelopment of capital markets, particularly institutional investors, limits the amount and maturity of funding available to the government locally, and can substantially increase the rollover and currency risks in managing public debt. At the same time, weak debt management practices, which result in fragmented issuance and a lack of a liquid benchmark yield curve, make it difficult for all borrowers (including corporate and home loan borrowers) to obtain long-term funding, and for institutional investors to undertake appropriate risk management. The broader development of capital markets is a complex and multifaceted problem that also needs to be addressed, but given the dominance of public debt in capital markets in the Central American countries, improving the public debt market is their logical first priority.