Development banks and the path towards a sustainable and efficient recovery


Juan E. Notaro
FONPLATA Executive President

The challenge is to assure that the sacrifices we have made so far pay off.

I review Latin-American newspapers and the news of these first days of June paint a gloomy picture. The region has become the global epicenter of the pandemic and the economic impact, according to experts, may last for several years.

The emergency tests health-care systems to address what is most immediate and urgent: the health of people affected by the COVID-19. Nonetheless, it also challenges the ability of helping those affected by the economic consequences of the lockdown.

On the frontline of the pandemic, “very tough weeks are coming”, according to the warning issued a few days ago by the Pan-American Health Organization, regional branch of the WHO. Cases will continue to rise in the largest countries of the region at least until August.

The same can be foreseen on the economic front. Economists in the region agree that the scenario ahead portends a recession. Although its magnitude is still difficult to estimate, it will finally take place.

In fact, according to the Inter-American Development Bank, some projections estimate that, due to the coronvirus crisis, “between 5.4 and 18 million people could become unemployed, raising the percentage of informal labor to 62% of total employment”.

The public health situation also strengthens historical inequities, such as access to drinking water, sanitation, and quality health-care services. In vulnerable population groups, health risks are even higher because of their difficulties to follow the lockdown and social distancing rules.

That is, those problems that we were not able to solve became worst, turning more urgent the need of solving immediate problems and finding ways to speed up solutions to the underlying problems.

The first, and perhaps most obvious, step in that strategy should be to strengthen health-care services to provide effective and good-quality care that focuses on prevention and helps to overcome the emergency, without sacrificing long term efficiency.

For that purpose, FONPLATA made available to its member countries a special fund for non-reimbursable cooperation, special funding lines with fast-track procedures for approval and disbursement, as well as the possibility of restructuring some existing loans. In that sense, other development banks that operate in the region have also provided significant financial support.

But we can do more. Alicia Bárcena, Executive Secretary of the ECLAC (Economic Commission for Latin America and the Caribbean), stated, in a recent event, that “development banks are stable and countercyclical sources of funding”.

In other words, even and specially in the most difficult times, development banks in the region can provide the resources needed by the governments to take measures to fight the recession of uncertain magnitude mentioned above.

According to the economic theory, investment in infrastructure projects is one of the most effective ways to ensure that the debt incurred by governments to overcome recession will really help the economic recovery.

Those projects, such as the construction of roads, bridges, ports, water and sanitation works, and other large works, generate trust in the recovery and stimulate the economy, because they create direct and indirect jobs.

However, it is not enough for banks to open their coffers and lend money. The health emergency and the severity of the coming recession force us to use that funding in a very efficient way.

Development banks will have to work together with their member countries and financial partners to attain the additional resources needed to meet future demands.

The current situation demands that development banks work closely with governments to assure a transparent management of those resources and, above all, with the greatest possible impact.

The measures taken for economic recovery must follow the same criteria as the ones taken for the health-care system (address the emergency, but think in the long term), especially regarding infrastructure projects.

That means, those projects must promote economic activity, contribute to generate jobs, build trust in recovery, but must also take future needs into account.

It is not an easy task, but FONPLATA and other development finance institutions are working to help find the best solution. And, above all, to assure that the sacrifices we have made so far pay off.

Text originally published in the monthly column of Juan E. Notaro in the Huffington Post.