REGIONAL REPORT higher interest rates are pushing commodity prices down as the global economy decelerates , reducing their cushioning effect
Inflationary effect on smaller LAC economies
As inflation continues to be elevated across Latin America and the Caribbean ( LAC ), the impact on real incomes and purchasing power remains a key challenge , especially for the most vulnerable . The IMF examined this challenge from the perspective of smaller economies in LAC by analysing recent inflation dynamics for three sub-groups of small economies : Central America ; Panama and the Dominican Republic ( CAPDR ); the Caribbean and the smaller economies in South America — Bolivia ; Ecuador ; Paraguay and Uruguay .
“ Our work shows that high inflation is a bigger challenge in smaller economies because they are less diversified , rely more on imports and have more limited policy levers at their disposal . The poorest households have been hit the hardest and food insecurity is on the rise . Many of these countries have pegged exchange rates and do not have an independent monetary policy . They therefore had to rely on temporary fiscal measures , of which about half were targeted to the most vulnerable . Countries with larger pre-existing subsidies tended to introduce smaller measures ,” explained the IMF .
During the first half of 2022 , inflation reached multi-decade highs in many of these countries . Smaller economies are typically less diversified and rely more on imports , making them more susceptible to inflationary pressures arising from higher import prices . Also , food and fuel — both of which have experienced large price increases since the beginning of the war in Ukraine — account for a larger share in the consumption basket in these economies .
“ Smaller economies also have more limited policy levers at their disposal . They typically have less flexible exchange rate arrangements , and therefore rely less on exchange-rate adjustments . Many of the small countries have high public debt and elevated sovereign spreads , partly a legacy of the COVID-19 pandemic . Facing higher public debt levels , smaller economies have more limited fiscal space and policy options at their disposal ,” continued the IMF .
“ The ongoing inflation wave is hurting the poor more , given the rapid increase in food prices . Inflation estimates across income quintiles in CAPDR show that over the past few months , the poorest quintiles have faced considerably higher inflation rates than the richest quintiles . The main driver of this discrepancy has been the increase in food prices . These developments may worsen food insecurity further , which had already increased during the pandemic ,” it added . n
ISMR December 2022 / January 2023 |
ismr . net | 35
ISMR19 _ OCT _ Saronni _ V2 . indd 1 10 / 10 / 2019 13:17