IMF: Food and fuel prices hold back Central American recovery

July 25, 2011 at 6:44 PM
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MANAGUA, Nicaragua, July 25 (UPI) -- Food and fuel prices threaten to hold back Central American growth, currently expected to reach about 4 percent this year, an International Monetary Fund survey said.

Worries over a potential fallout from the U.S. Congress financial wrangle are an additional issue as senior policymakers from the region meet Thursday in Managua for two-day talks. The meeting is focused on setting priorities to deal with the emerging threats to fragile interdependent economies that sustain more than 40 million people.

Falling foreign remittances from North America, especially the United States, have hit the region as dependent families wait for U.S. construction and industry to regain momentum.

Economic and fiscal leaders, including ministers and central bankers, will be sharing expertise with IMF experts.

Miguel Savastano, deputy director of the IMF's Western Hemisphere Department, said Central America needs to have a stronger fiscal position to guard against future shocks.

To boost growth in the medium term, Savastano said, priority should be given to policies that strengthen competitiveness.

Both the global and regional economic outlooks are important when looking at "economic policies that they are planning to implement, and what adjustments may be necessary given the external situation," he said.

"Central America's main commodity exports are agricultural -- mainly coffees," Savastano said. "The higher prices for these products have increased export earnings but imports of foodstuff also have increased. Central America has definitely been hit hard by high oil prices because the region is a net importer of oil and the import bill is large."

Although most regional countries hit hard by high fuel prices had passed on those costs to the consumers, recent hikes were far too great to be passed on.

"Some governments are providing targeted subsidies to mitigate the effects of higher prices on the poorest members of society. And that, of course, puts pressure on the fiscal deficits," he added.

High commodity prices had also pushed up inflation in Panama and El Salvador, which is projected at about 6-7 percent.

The region's countries also need to lower their debt burden, Savastano said.

A key recurring worry for Central American governments was the potential impact of the medium-term prospects for the U.S. economy and the world economy, he said.

"Latin America is currently experiencing tailwinds from strong capital inflows and high commodity prices, but Central America is affected differently by these factors," Savastano said, citing overvaluation of currencies in Brazil, Chile and other South American countries because of high levels of investment drawn to their interest rates.

"Central America has a different dynamic and this conference is an opportunity for the IMF to present its analysis and help policymakers come up with policy responses tailored especially for them, Savastano said.

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