- ECLAC says that the region’s GDP growth rate is expected to drop by 9.1%;
- Tourism is one of the sectors that has been hit hardest by the crisis and affected the most Caribbean and Central America’s countries.
The economic impact of the COVID-19 pandemic in Latin America is likely to cause a 10 years setback in the region, according to the most recent survey by the Economic Commission for Latin America and the Caribbean (ECLAC), a United Nations body.
ECLAC says that the region’s GDP growth rate is expected to drop by 9.1%, while steep rises are forecasted for the poverty rate, which will reach 37.3% of the region’s population, and the unemployment rate, which may reach 13.5%.
Before the COVID-19 pandemic, Latin America already had low growth rates (averaging 0.4% between 2014 and 2019) and increasing social and macroeconomic vulnerabilities (and experts already pointed out that the region had lost a decade of development in that period).
Because of that, the Union Nations‘ Commission says that the recovery will be slower and that the economic and social costs of the coronavirus crisis could continue to rise throughout 2020 and 2021.
Tourism is one of the sectors that has been hit hardest by the crisis, due to lockdown measures. In the first five months, international tourist arrivals fell by around 45% in South America, 45% in Central America, 34% in Mexico, and 50% in the Caribbean, compared with the same period in 2019, according to the report.
Caribbean countries are the most exposed of the region since the tourism economy accounts for around 35% of GDP, followed by the Central American countries (about 10% of GDP). “The weight of tourism in total employment in these countries is even greater, which will have profound consequences for unemployment, household income, and poverty levels,” says the report.
ECLAC’s report also shows a jump in work absenteeism. In Chile, the proportion of the employed absent from work but receiving pay (due to work protection policies) represented 15.4% of all those employed between March and May 2020, up 149.8% compared to the same period in 2019.
There was also an increase in underemployment. In Mexico, the hourly underemployment rate increased from 7.8% in May 2019 to 29.9% in the same period this year, and, in Costa Rica, it rose from 9.5% between March and May 2019 to 17.5% in the same period in 2020. Without governments’ measures, the impact on the employment rate would have been more evident, says ECLAC.
The drop in economic activity has harmed tax revenues, which have fallen sharply in many countries of the region. Monthly figures show that in some cases value-added tax (VAT) revenues — closely linked to private consumption — have fallen by up to 40% year-on-year in real terms. Similar contractions have been observed in income tax receipts. The decline in tax revenues is the result of not only the paralysis of economic activity but also the tax relief measures implemented in the region because of the COVID-19.
Tax revenues from non-renewable natural resources have also lost ground as international prices have fallen, particularly the price of crude oil. At the same time, there has been a hike in public expenditure, with substantial increases in the budget ceilings.
According to the report, Latin America is facing its biggest fiscal challenge since the public debt crisis of the early 1980s, when it was -6.1% of GDP. The fiscal efforts made by the countries in the context of the crisis are expected to push average public spending up to 25.4% of GDP in 2020, compared to 21.7% last year.
Latin America is in crisis. What now?
According to the survey, there is a way of facing all these challenges. ECLAC suggests that economic policymakers in Latin America can prevent economic collapse through:
- policies to stimulate aggregate demand;
- managing the pressure on foreign-exchange and monetary systems generated by the external shock;
- and administering capital flows properly to make fiscal and monetary policies more effective, all while addressing economies’ external vulnerabilities.
ECLAC advises that the key economic policy tasks in the post-pandemic period will be to build welfare states, strengthen product development and implement policies to promote environmental sustainability. “The region should seize this moment to embark on a different development path, in line with the Sustainable Development Goals of the 2030 Agenda for Sustainable Development”, it has said.
In ECLAC’s view, international cooperation will play a vital role in coordinating the various parties and thus increasing the effectiveness of those efforts.