Public spending and declining revenue push Central America’s fiscal deficit

RIO DE JANEIRO, BRAZIL – The loss of revenue and the increase in public spending to tackle the Covid-19 pandemic will push Central America’s average fiscal deficit to 6.6% of gross domestic product (GDP) in 2020, the Central American Institute for Fiscal Studies (ICEFI) said on Monday.

Such conclusion is drawn from Central America’s macro-fiscal profile, prepared by ICEFI, which also highlights that 2021 is a “year without much reason to celebrate” in the region.

Deficit increased from 2.9% in 2019 to 6.6% of GDP last year, as a result of the impact caused by the pandemic, which led to a rise in public spending and a drop in tax collection due to the collapse of economic activity.

ICEFI’s senior economist Abelardo Medina said that all Central American countries, with about 48.5 million inhabitants -more than half of them poor- posted an increase in the deficit.

“The deficit increased because governments spent more in an attempt to partially offset spending to address the pandemic and because of the contraction in tax collection,” he said.

In Costa Rica, the deficit increased to 8.1% of GDP in 2020; in 2019 it stood at 6.7%, the lowest increase in relative terms in the region, which reports more than 1.3 million infections.

According to ICEFI, El Salvador increased its deficit from 3% of GDP in 2019 to 10.6% in 2020; Honduras, from 2.1% to 7%; Panama (from 3.8% to 7.3%); Guatemala (from 2.2% to 4.9%) and Nicaragua grew from a surplus of 0.3% in 2019 to 1.5% in 2020.

HIGH PUBLIC DEBT

Public spending to mitigate the effects of the crisis triggered by the pandemic led to an increase in public debt in Central America in 2020.

Before the outbreak of the coronavirus crisis, public debt sustainability “was already complicated” for several countries in the region and then “became critical,” said the Guatemala-based agency.

Medina pointed out that debt has increased “dramatically for some countries” in Central America and mentioned Honduras as an example, which at the end of 2020 reached 59.4% of GDP and would grow to 60.9% in 2021.

Honduras’ debt is rated as “highly speculative” and “speculative non-investment grade”, according to Moody’s and Standard and Poors, respectively, so the country needs to promote a “fiscal adjustment” to ensure the sustainability of its obligations in the long term, emphasized ICEFI.

El Salvador is the country that reached the “highest” public debt balance in the region in 2020, 89.2% of GDP, which should grow to 90.6% in 2021, it added.

Panama’s debt in 2020 stood at 69.8% of GDP and in 2021 should increase to 74.4%, and Costa Rica’s reached 67.5% last year and should increase to 73.9%, according to ICEFI estimates.

Nicaragua, in turn, posted a public debt of 45.1% of GDP in 2020 and in 2021 it should stand at around 47.4%, while Guatemala posted a debt of 31.7% last year and it is estimated that it should increase to 35.1% the following year.

RISING REVENUES VS. REDUCING EXPENSES

“All countries have a growing (public debt) problem and are approaching the limits where debt can be considered unsustainable,” said the senior economist.

In his opinion, public debt is a consequence of countries’ “corruption and the systematic failure of fiscal and tax policy.”

Central American governments should “increase revenues and reduce expenditures,” but “without implementing an austerity scheme that would drastically reduce expenditures,” he explained.

Military spending and the bureaucratic system, as well as privileges for public officials, must be “eliminated” and, in addition, to “seriously” fight tax evasion, tax fraud, smuggling and illegal capital flows, said the ICEFI economist, who lamented countries’ unwillingness to fight corruption.