Latin America, Caribbean Urged To Close $99B Financing Gap

News Americas, New York, NY, December 11, 2024: Leaders across Latin America and the Caribbean, (LAC) are being urged to adopt key strategies to close a $99 billion annual financing gap and move towards sustainable development, according to the newly released 2024 Latin American Economic Outlook (LEO): Financing Sustainable Development report. The comprehensive report outlines a roadmap to bolster tax collection, improve public spending efficiency, manage public debt more effectively, and attract private sector investment to support ambitious development agendas.

The report, produced collaboratively by the OECD, UN-ECLAC, CAF-Development Bank of Latin America and the Caribbean, and the European Commission, highlights the socioeconomic challenges the region faces. While poverty levels in 2023 reached their lowest in two decades at 27.3%, extreme poverty still impacts over 10% of the population. Additionally, labor productivity in LAC remains at only 33% of OECD levels.

With limited fiscal space due to the COVID-19 pandemic and tight monetary policies to manage inflation, the report emphasizes the need for targeted reforms to achieve sustainable development goals.

Key Recommendations:

1. Tax Reforms and Revenue Growth:
   LAC countries collect an average of 21.5% of GDP in taxes, significantly lower than the OECD average of 34%. Adjusting tax structures could reduce inequalities, support green initiatives, and foster entrepreneurship.
2. Optimizing Public Spending:
   With 82% of public expenditures focused on short-term wages and transfers in 2023, reallocation and efficient use of budgets could free up resources for critical investments in health, education, and infrastructure.
3. Enhanced Debt Management:
   Robust fiscal frameworks are essential as debt servicing has grown from 9.8% of tax revenue in 2012 to 12.2% in 2022. Several countries spend more on interest payments than on education or healthcare, underscoring the need for fiscal sustainability.
4. Private Sector Mobilization:
   Deepening financial markets and expanding private sector credit, which currently accounts for just 50% of GDP, could unlock significant resources. Special attention is needed to include vulnerable groups, such as women and informal households, in financial systems.
5. Transforming Production and Markets:
   Expanding private sector participation in debt markets, which are currently dominated by public-sector issuances (81% between 2015-2023), will require updated regulations, financial literacy programs, and enhanced regional integration.
6. Boosting Development Finance Institutions (DFIs):
   DFIs play a crucial role in supporting micro, small, and medium enterprises, but only 19% of their instruments currently address the green transition, gender equality, or digital transformation.
7. Promoting Innovative Financing:
   Mechanisms such as green, social, and sustainability-linked bonds have grown to represent 35% of LAC’s bond issuance in international markets by 2023. The report recommends expanding these instruments and introducing catastrophe bonds, debt-for-nature swaps, and disaster clauses to target high-need areas effectively.
8. International Cooperation:
   Initiatives like the EU-LAC Global Gateway Investment Agenda are highlighted as critical for mobilizing resources through public-private partnerships, particularly in infrastructure, job creation, and social cohesion.

Regional Coordination for Global Impact

The LEO report stresses the importance of presenting a unified regional perspective at the UN’s Fourth International Conference on Financing for Development, scheduled for mid-2025 in Sevilla. Harmonized frameworks and transparent monitoring mechanisms are essential to prevent greenwashing and ensure sustainable financing outcomes.