Press Release No. 10/292

Press Release: Statement at the Conclusion of the Ninth Regional Conference on Central America, Panama, and the Dominican Republic

July 16, 2010

The following statement was released today in Tegucigalpa, Honduras, by the Deputy Managing Director of the International Monetary Fund, Mr. Murilo Portugal, the Director of the Western Hemisphere Department, Mr. Nicolás Eyzaguirre, the President of the Central American Monetary Council, Mr. Antenor Rosales Bolaños, the President of the Central American Council of Finance Ministers, Mr. Edgar Balsells, the Acting President of the Central American Council of Financial Sector Superintendents, Mr. Francisco Lay Solano, and Mrs. María Elena Mondragón de Villar, President of the Central Bank of Honduras and host of the conference.

"The ministers of finance, central bank governors, and financial sector superintendents of Central America, Panama and the Dominican Republic, jointly with representatives of IMF management and staff, and representatives of other international financial institutions, met in Tegucigalpa, Honduras, during July 15-16 to discuss the regional economic outlook and contribute to the quest for solutions to the macroeconomic and financial policy challenges. This year’s conference focused on the fiscal policy stance that is most appropriate in the current juncture, the effectiveness of monetary and exchange rate policies, and the outlook for bank lending.

"The conference took place against the backdrop of the global economic recovery, which is proceeding at different speeds and is, generally, more robust in emerging markets than in the advanced economies. For Central America, it is important that the United States’ economic recovery is underway and is somewhat faster than expected a few months ago, though there is still uncertainty about the duration of this recovery. Participants agreed that the recent wave of turbulence in the sovereign debt markets, especially in southern Europe, is a reminder to policy makers that risks remain.

“The economies of Central America, Panama, and the Dominican Republic were severely affected by the global economic crisis of 2008-09. Participants in the conference emphasized that the region’s fiscal position was relatively solid in the wake of the global crisis, which made possible for the authorities to accommodate the cyclical deterioration in revenue and to mitigate the decline in domestic demand through higher public spending. However, as a result of these policies, fiscal deficits and public debt increased and the composition of expenditure deteriorated. Participants agreed that it is important to begin implementing a fiscal consolidation process to rebuild fiscal space and ensure public debt sustainability. In most countries, the consolidation process should focus on implementing public expenditure policies, though higher tax revenues are necessary to improve the provision of public goods and increase investment in infrastructure. The need to pursue fiscal structural reforms, adopt multiyear budgets, and improve financial management frameworks was also highlighted. These policies have to be accompanied by supply side policies, including macro and microeconomic structural reforms such as fostering the reform of the State, streamline the ease of doing business, strengthening foreign investment regulations, and promoting private sector participation in infrastructure projects through public-private partnerships that are consistent with fiscal sustainability.

“The expansionary monetary policy implemented by the majority of the region’s central banks was moderately successful in mitigating the adverse effects of the global crisis. Limited exchange rate flexibility, high dollarization of banks’ balance sheets, and shallow financial sectors weakened the transmission channels of monetary policy. Central bank presidents in the less-dollarized economies agreed to step up efforts to improve their monetary frameworks, through various policy measures, including the gradual transition to inflation targeting regimes and developing private equity and public debt markets.

“Participants in the conference noted that prudential policies adopted in the past years played a key role in protecting the financial systems in the region during the global crisis and highlighted that no country had serious problems in their banking system. Although credit to the private sector remains subdued, owing to the slow pace of economic recovery, credit to the private sector is expected to pick up as the economy strengthens. Participants in the conference agreed that fiscal consolidation could increase the credit available to the private sector, and that policies aimed at reviving public or private credit should be consistent with market mechanisms. Participants also stressed that modernizing and deepening financial markets is essential to improve the transmission mechanism of monetary policy. The financial superintendents underscored their intention to continue tightening prudential regulations, especially by increasing provisions and limiting risk-taking.

“Participants welcomed the support provided by the IMF to the countries of the region during the crisis, highlighting the flexibility shown by the new credit instruments, particularly regarding access and maturities. Participants also commended the strengthening of technical assistance and training activities in the region through the launch of the Central America-Panama-Dominican Republic Regional Technical Assistance Center (CAPTAC-DR), and conveyed their special thanks to the governments of Canada, Germany, Mexico, and Spain, as well as to the European Commission, the Inter-American Development Bank, and the Central American Bank for Economic Integration for their generous financial support to the Center. Participants also recognized the financial and technical support provided by other multilateral institutions and requested their continued support.

“Participants agreed that the next annual conference would take place during July 28-29, 2011, and expressed their gratitude to Nicaragua for offering to host the Tenth Regional Conference”.