Latin America’s success in curbing inflation is under threat due to rising fiscal imbalances, driven by increased government spending to stimulate growth, according to a new report from the World Bank. The region, which has made significant progress in controlling historically high inflation, faces challenges as fiscal rules are loosened and public spending increases.
William Maloney, the World Bank’s chief economist for Latin America and the Caribbean, highlighted that many governments in the region are under pressure to boost the economy through higher spending, often leading to minimum wage hikes aimed at increasing consumption. However, this could undermine the hard-won gains in inflation control. In an interview with Bloomberg, Maloney warned that Latin America is at risk of losing its macroeconomic discipline, which could lead to further instability.
The World Bank predicts that Latin America’s economy will grow by 1.9% this year and 2.6% in 2025, slightly above previous estimates but still trailing behind other global regions. Maloney emphasized that while unemployment rates are low, many households rely on government transfers, as wages have not fully recovered to pre-pandemic levels.
Another concern raised by the World Bank is the resistance to fiscal reforms that could generate more revenue for governments. Central banks have managed to keep inflation in check through high interest rates, but this has also slowed economic growth. Countries like Colombia, Peru, and Chile have begun to lower interest rates, while Brazil has taken a more cautious approach due to ongoing inflationary pressures.
The report also highlights that while minimum wage hikes have helped improve living standards in some countries, further increases could negatively impact labor markets, leading to higher unemployment and informality. To address fiscal challenges, the World Bank suggests implementing a wealth tax on property, which could generate up to 3% of GDP in revenue.
