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Covid and after: the battle for fiscal space in LAC

Record fiscal deficits in 2020

The Covid-19 pandemic was a major shock to the LAC economies. In some senses it was the latest in a long line of external shocks, which have included the Great Depression of the early 1930s and more recently the foreign debt crises of the 1980s, the Asian economic crisis of 1997, and the Great Recession of 2007-2009. These crises have all been characterised by destabilising external events which caused uncertainty, led to capital flight from the LAC countries, and/or triggered widening fiscal deficits as governments struggled to stimulate their faltering economies. In some senses the pandemic was different and more serious, because it involved combined demand and supply-side shocks - a rapid fall in external demand coupled with simultaneous domestic supply reductions as quarantines, lockdowns, and mobility restrictions were imposed. In other respects, the pandemic was more benign – it did not, for example, lead to a sharp reduction in foreign currency reserves across the region. However, the sheer scale of the latest ‘shock’ does differentiate it from its predecessors. Contraction in economic activity in 2020 was the deepest in a generation.

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