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IMF Urges Latin America to Maintain Fiscal Rigor as Growth Cools

Latin American and Caribbean nations should resist the urge to use fiscal policy to stimulate their economies even as the region’s growth outlook weakens, the International Monetary Fund said.

Governments should only consider such actions in the event of a sharp downturn, the IMF said in a regional economic outlook update published today.

“Looking forward, fiscal consolidation should continue as public debt levels remain above pre-crisis levels in most countries,” the fund said. “Authorities should avoid the temptation of easing fiscal policy too early; this should be considered only if large downside risks materialize.”

Spending restraint will also help fight exchange-rate appreciation, the report said. The Chilean peso has strengthened 9.8 percent against the U.S. dollar this year, the biggest gain after the Hungarian Forint among more than 150 currencies tracked by Bloomberg. The Mexican and Colombian pesos are also among the top five currency gainers this year.

Growth in the region has slowed because of weaker global demand and the bigger-than-expected impact of monetary policy tightening, the report said. Central banks including Brazil’s, Colombia’s and Chile’s raised interest rates in the first half of 2011 to curb inflationary pressure.

In Brazil, the region’s largest economy, President Dilma Rousseff’s government has boosted spending and cut taxes to try to revive the economy, which analysts surveyed by the central bank forecast will grow 1.57 percent this year, down from 2.7 percent in 2011. The country’s budget surplus before interest payments in August was the smallest for the month since 2002.

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