Caribbean & Central America - May 2021

Central American economies have suffered deep recessions due to the coronavirus (Covid-19) pandemic, pushing millions into poverty and threatening to spark social unrest, according to a series of recent reports.

One report, published by the Inter-American Development Bank (IDB) in March, estimates that 2.1m people in Central America will fall into poverty as a result of the pandemic, an increase of six percentage points on current poverty levels. The bank said that 581,000 people will fall into poverty in Guatemala; 536,000 in Honduras; 478,000 in El Salvador; 301,000 in Panama; and 247,000 in Costa Rica. The report estimates that in Honduras, the poverty rate will rise to 59.3% of the population following the pandemic, up from 53.8%; in Guatemala it will rise to 54.9%, up from 51.4%; in El Salvador it will rise to 35.9%, up from 28.5%; in Panama it will rise to 23.2%, up from 16.1%; and in Costa Rica it will rise to 19.7% up from 14.8%.

“The Covid-19 crisis could erase social progress achieved in Central America, specifically in reduction of poverty and inequality, and also have a disproportionate effect on people who are the most vulnerable”, the IDB report says. The bank notes that social assistance programmes launched by governments have mitigated the increase in poverty rates, but this varies from country to country, and the true extent of the increase will depend on economic recovery and the performance of different sectors. Members of the vulnerable middle class are worst affected, according to the IDB, as they tend to work in sectors most hit by the crisis, such as tourism; and tend to work in small companies, which have suffered more than large ones.

They are also not benefitted by social assistance programmes, which tend to target the most vulnerable households, which means the middle class has been squeezed while the poorest and richest are less affected. “In order to keep polarisation and social discontent from rising, governments must strengthen social services such as education and health, make their revenue and public spending mechanisms more effective, and generate more political and social inclusion for groups which are underrepresented” the IDB report argues.

Alicia Bárcena, executive secretary of the United Nations Economic Commission for Latin America and the Caribbean (Eclac), made similar points in a statement announcing Eclac’s report, ‘Social Panorama of Latin America 2020’, published on 4 March. “The pandemic has exposed and exacerbated the region’s major structural gaps and currently, we are living in a time of heightened uncertainty in which neither the way out of the crisis nor the speed of that process is yet known” Bárcena said. “There is no doubt…the costs of inequality have become unsustainable and… it is necessary to build back with equality and sustainability, aiming to create a true welfare state, a task long postponed in the region (see sidebar)”.

On 26 April the World Bank (WB) weighed in with recommendations as to how regional economies can recover from the pandemic in a report entitled ‘Unleashing Central America's Growth Potential’. The WB underlines that the Central American economy grew by an average of 4.5% per year between 1991 and 2017, outperforming the rest of Latin America and the Caribbean, but there was little productivity growth during this time. In terms of the impact of the pandemic, the WB estimates that Panama’s GDP contracted by 17.9% in 2020; Honduras’s by 9%; El Salvador’s by 8.6%; Costa Rica’s by 4.6%; Nicaragua’s by 2.5%; and Guatemala’s by 1.8%.

The WB report recommends a series of reforms designed to boost productivity, which it defines as “a greater ability of firms and the workforce to produce more and better goods and services”. These include “reducing costs and barriers to trade; boosting investment in human capital, innovation, and physical and digital infrastructure; attracting private investment through improving business environment and the quality of institutions, and a greater inclusion of women and young people in the labour market”.

There is certainly plenty for governments in the region to get their teeth into. But a good place to start is rebuilding physical infrastructure damaged by hurricanes ‘Eta’ and ‘Iota’, which hit the Central American isthmus in November 2020, to help get their economies moving again. In Guatemala, for example, on 28 April the government announced it would invest Q2.4bn (US$310m) in reconstruction work in 2021-2022, focusing on schools, houses, and roads. Construction is also continuing on a new international freight airport in Escuintla department. On 3 May government officials announced that the next phase involves a 700m extension to the airstrip which will allow it to handle fully-laden Boeing 747 aircraft.

Officials from Guatemala’s national association of municipalities (Anam) have also signed an agreement designed to promote the creation of free trade zones (FTZs) as part of a plan to reactivate the economy and arrest increasing poverty rates. In 2020 the Guatemalan government rolled out social programmes such as the ‘family grant’, which paid out Q2,250 to the most vulnerable households measured by electricity use, and ‘food support’, which delivered parcels of basic supplies to around 31,000 households to mitigate the effects of the pandemic. However, congress decreed that each household could only benefit from one of the two programmes, and both are one-time benefits. The country continues to struggle with the pandemic, and the almost non-existent vaccine rollout, means many Guatemalans remain at risk of falling into poverty for the foreseeable future.

In Honduras, on 3 May the agriculture & livestock ministry announced HL100m (US$4.2m) in direct payments to small farmers to help them recover from Eta and Iota. Another HL50m have been paid out to small farmers to boost production and ensure food security, the government’s national entrepreneurship and small business service (Senprende) said on 20 April. More help arrived on 22 April when congress approved reforms to the Covid-19 assistance law, which will cancel mortgage and loan repayments from a number of social lending institutions.

However, a study from the Universidad Nacional Autónoma de Honduras (Unah) released at the end of April found that poverty rates have skyrocketed due to Eta, Iota, and the pandemic. The Unah study estimates that 70% of households live in poverty, higher than the IDB estimate, and 53.4% in extreme poverty. Unah recommends that the government rethink which families receive conditional and non-conditional cash transfers under future social programmes in order to make them more effective.

National governments grappling with the economic fallout of the pandemic may benefit from renewed US interest in providing economic support for Central America. US Vice President Kamala Harris had a virtual meeting with Guatemala’s President Alejandro Giammattei on 26 April, promising US$310m in humanitarian aid to the region designed to combat food insecurity. Further economic support which aims to curb irregular migration to the US is also in the pipeline, although it appears likely these will be tied to the implementation of anti-corruption measures. Harris is set to visit Guatemala in June, and the trip will give a better idea if the US administration led by President Joe Biden will push for reforms in exchange for support.

• Inequality

Eclac emphasises that in Central America, as in the rest of Latin America, the slide of the new middle class is a process that had started before the pandemic, which has increased household debt that adds to uncertainty and a feeling of vulnerability. Eclac believes that social discontent will encourage demands for change and exacerbate social conflict.