## Regional Economic Outlook: Western Hemisphere — References and Selected Chapter Content (October 2025)

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### Identifiers, Publication Note, and Errata
- ISBNs:
  - 9798229025065 ( paper)
  - 9798229025119  (ePub)
  - 9798229025133  (Web PDF)
- Publication note:
  - The Regional Economic Outlook: Western Hemisphere is published once a year, in the fall, to review developments in Latin America and the Caribbean.
  - This report reflects developments and staff projections available through September 30, 2025.
- Errata:
  - November 5, 2025: web version updated to reflect changes to the PDF published online on October 17, 2025:
    - The scale on the right axis of Figure 3.3, panel 3 has been adjusted by a factor of 100.
    - The formula in footnote 2 of Figure 3.3 has been corrected due to a typographical error in the original version.

### EMBIG Sovereign Spreads — Key Findings, Context, and Policy Recommendations
- Index baseline and sources:
  - Index: January 1, 2025 = 100.
  - Sources: Bloomberg Finance L.P.; IMF, Direction of Trade Statistics database; IMF, World Economic Outlook database; and IMF staff calculations.
- Regional macroeconomic context and EMBIG implications:
  - Currencies rebounded after initial depreciation, bond yields declined and exhibited greater differentiation across countries, and commodity prices stabilized.
  - Empirical evidence points to lags in the effect of global uncertainty on growth in the region (Online Annex 1).
  - Activity surprised to the upside in several LAC countries early in the year; export contribution to growth increased driven by copper and manufacturing exports (Chile, Mexico) and agricultural output (Argentina, Brazil, Colombia, Uruguay).
  - Recent US dollar depreciation may be tempering effects of shocks by reducing inflationary pressures.
- Inflation and monetary policy developments:
  - Inflation convergence toward targets continues, though at a slower pace since early 2024.
  - Country examples for headline inflation:
    - Broadly stable around the target in Peru and Paraguay.
    - Continued to fall in Chile and Uruguay.
    - Picked up in Brazil and Mexico in early 2025.
    - After a decline in the first half of 2025, inflation edged up in Colombia.
    - Argentina has continued to make progress in the context of its stabilization program.
  - Core inflation: after declining rapidly from its 2022 peak, core goods and core services inflation rose slightly in the region in 2025.
  - Monetary policy actions:
    - Mexico continued its easing cycle that started in early 2024.
    - Chile, Colombia, Peru, and Uruguay resumed easing after pausing and/or pivoting in early 2025.
    - Brazil pivoted toward tightening in early 2025.
    - Paraguay stayed on hold.
  - Monetary policy guidance:
    - A continued cautious, data-driven approach is warranted given heightened uncertainty and inflation expectations that are stable but remain above target.
    - Note: simulations in fiscal charts adjust nominal rates by "100 basis points" for sensitivity analysis.
- Fiscal positions and debt dynamics:
  - Most countries are expected to strengthen fiscal positions in 2025, but public debt ratios continue to increase and have reached or surpassed pandemic peaks in some countries.
  - Primary balance improvements reflect revenue upticks (including tax administration improvements in Paraguay) and expenditure restraint; however, many planned measures remain to be identified or enacted.
  - Debt-stabilizing requirement:
    - Assuming financing costs in line with long-term trends, primary balances needed to stabilize LA7 debt at the current levels are, on average, about "1½ percentage points of GDP" higher than the 2024 outcomes.
  - Exchange-rate shock effect on debt:
    - A one-standard-deviation shock to the real exchange rate could decrease LA7 debt by about "four percentage points of GDP" over the next five years (IMF 2024a).
  - Fiscal policy has been expansionary amid tight monetary policy since 2022; structural primary balances for 2025 and 2026 are projected to be lower than anticipated in October 2024.
- Growth and inflation projections:
  - LAC growth is projected at "2.4 percent in 2025", moderating to "2.3 percent in 2026".
  - Caribbean economies (excluding Guyana and Haiti) are expected to grow "1.9 percent in 2025 and 2026".
  - Inflation in LAC (excluding Argentina and Venezuela) is expected to remain broadly stable at "4.3 percent in 2025", resuming its downward trend to reach "3.5 percent in 2026".
  - CAPDR inflation: "2.2 percent in 2025 and 3.3 percent next year".
  - Medium-term: LAC medium-term growth expected to be about "2½ percent annually".
- Risks:
  - Downside growth risks: global slowdown, heightened policy uncertainty, tighter financial conditions, higher trade barriers/shipping costs, natural disasters, tighter-than-expected domestic policies.
  - Inflation risks more balanced: persistent services inflation, higher labor costs, delays in fiscal consolidation vs. demand shocks and trade-policy-driven disinflation; exchange rate and commodity price movements present bidirectional risks.
- Policy recommendations (bullet form preserved):
  - Fiscal consolidation is critical and cannot be further delayed:
    - Rebuild buffers, reduce debt, and support inflation convergence and inflation expectations.
    - Address spending inefficiencies and implement growth-friendly revenue mobilization to protect investment and social spending.
    - Anchor fiscal policy within credible multiyear frameworks underpinned by clear rules.
  - Monetary policy:
    - Remain cautious and data-driven to bring inflation back to targets while avoiding undue pressure on activity.
    - Preserve and strengthen monetary policy frameworks, central bank independence, capitalization, and governance.
    - Allow exchange rates to absorb shocks where feasible; use IMF Integrated Policy Framework guidance for FX interventions when warranted to address financial stability risks.
  - Structural reforms:
    - Advance reforms to lift potential growth and productivity, address resource misallocation, and improve firm-level productivity (constraints include size-based policies, financial constraints, and limited competition).

### LA7: Monetary and Fiscal Policies — Effectiveness, Interactions, and Policy Priorities
- Monetary policy effectiveness and central bank independence (CBI):
  - CBI has helped to reduce inflation; response of inflation to changes in CBI is expressed as cumulative change of 100 × log CPI over a 10-year horizon (Figure 1.10, panel 1).
  - A 100-basis-point monetary policy tightening shock produces observable responses at an 18-month horizon; variables reported at 18-month horizon include Inflation, Exchange rate (logs; increase = depreciation), Long-term yields (LT yields), and Inflation expectations (Infl. exp.) (Figure 1.10, panel 2).
  - Monetary policy is highly effective in low-debt economies relative to high-debt economies; interaction specification uses an indicator for countries with debt higher than the 80th percentile.
  - Local projection controls include: one lag of output gap, transformed CPI inflation, exchange rate regime, general government gross debt, a fiscal rule indicator, and US inflation.
- Fiscal policy stance and consolidation:
  - LA7 = Brazil, Chile, Colombia, Mexico, Paraguay, Peru, Uruguay (simple average).
  - Structural primary balance figure axis values shown include: 0.5, −3.5, −3.0, −2.5, −2.0, −1.5, −1.0, −0.5, 0 (Percent of potential GDP).
  - Note on country-specific structural balance definitions:
    - Chile: central government’s structural non-mining primary balance.
    - Colombia: consolidated public sector’s structural non-oil primary balance.
    - Peru: nonfinancial public sector’s structural primary balance.
  - The material notes that consolidation has been further delayed.
- Productivity, resource misallocation, and trade integration:
  - TFP losses from resource misallocation measured in percentage points (scale includes 0, −10, −20, −30, −40, −50).
  - Intra-regional trade is between 40 and 50 percent lower than in regions with similar economic and geographic characteristics.
  - Trade integration measures: ESI = export similarity index; LAC = Latin America and the Caribbean; MEX = Mexico; TFP = total factor productivity.
  - Significance markers in figures: ***p < 1%, **p < 5%, *p < 10%, +p < 20%.
- Channels, vulnerabilities, and uncertainty:
  - Uncertainty effects on real GDP are more contained with stronger institutions and lower debt (Figure 1.12).
  - Box 1.1: heterogeneity in transmission of policy shocks across LAC driven by trade structure, commodity dependence, reliance on global capital markets, and remittances; LAC participation in GVCs is lower than peers; estimated immediate impact of uncertainty on growth is limited but increasingly negative over time.
  - Overall, recent policy shifts and higher uncertainty are likely to be negative for LAC growth; effects on inflation are ambiguous but likely deflationary on balance.

### CAPDR: Remittances, Repatriations, Trade Exposure, and Risks (Box 1.2 & Remittances Note)
- CAPDR growth and projections:
  - Real GDP growth eased in 2024 to 3.6 percent.
  - Growth is projected to ease further to 3.4 percent in 2025–26.
- Remittances and repatriations developments:
  - Remittances accelerated in the first half of 2025 (January–August 2025 growth was much higher than in 2024).
  - The rise primarily reflected larger per-transfer amounts in El Salvador and Nicaragua.
  - Remittances projected to unwind and decline (especially as a percent of GDP) from 2026 onward amid US migration policy tightening.
  - US policy actions: termination of the parole program for Nicaragua, and termination of Temporary Protected Status for Nicaragua and Honduras; IMF staff estimates show increased repatriations from the United States to CAPDR in 2025, particularly starting in May.
  - Remittances growth in 2025 points to precautionary savings being transferred, rather than changes in US labor market; repatriations trending upward but still below the 2022 high.
- CAPDR trade exposure and tariffs:
  - The United States is the largest market for CAPDR: exports constitute between a third and a half of all exports, accounting for 4–21 percent of GDP (except Panama, where goods exports are a small share of GDP).
  - Most CAPDR countries (except Costa Rica and Nicaragua) face the baseline 10 percent tariff in the US market; announced tariffs as of August 7, 2025 are 15 percent for Costa Rica and 18 percent for Nicaragua.
  - A significant share of products CAPDR exports to the United States are also exported by Mexico and are covered by the US-Mexico-Canada Agreement (USMCA); CAPDR producers are not deeply integrated in USMCA-based supply chains, limiting indirect benefits from intra-USMCA trade expansion.
- Data and measurement notes:
  - Remittances: Seasonally adjusted. For Nicaragua, data for May is estimated by IMF staff. Remittances data for June to August 2025 excludes Nicaragua.
  - Repatriations: Include administrative and enforcement returns, removals and Title 42 expulsions.
  - Estimation approach for 2025 repatriations: Since December 2024, repatriations are estimated using ICE book-ins; repatriations-to-book-ins ratio calculated through November 2024 and projected to remain constant; book-ins data published through August 2025 used to estimate repatriations in 2025.

### Argentina’s Structural Reform Agenda (Box 1.5) — Reforms, Progress, and Outlook
- Background: Argentina faced substantial structural impediments to growth during 2010–22, including harsh FX controls, stringent product and labor market regulations, deterioration in regulatory quality, government effectiveness, and governance/transparency.
- Core reform areas and actions:
  - Trade Liberalization:
    - Reduced numerous (and highly discretionary) tariff and non-tariff trade barriers.
    - Eased most FX restrictions (although some were reintroduced recently).
    - Simplified customs procedures through digitalization.
    - Better aligned regulations with international norms.
    - A new investment regime (RIGI) has secured commitments of over 15 billion dollars in foreign direct investment (FDI), primarily in energy and mining.
  - Financial Deregulation:
    - Removed interest rate controls on loans and deposits.
    - Introduced new financial instruments.
    - Securities regulator shifted focus to market-friendly post-issuance oversight.
  - Product Market Deregulation:
    - Repealed or amended over 1,000 regulations across key sectors.
  - Labor Market Modernization:
    - Updated regulations to permit sectoral collective bargaining.
    - Simplified the tax system for independent workers.
    - Extended trial periods for new hires.
  - State Transformation:
    - Streamlined public entities, closed trust funds, converted SOEs to joint-stock companies ahead of privatization.
    - Modernized administrative processes and implemented a civil service reform.
- Ongoing agenda and outlook:
  - After expiration of delegated executive powers in July 2025, the administration launched the “Zero Bureaucracy” initiative to further reduce red tape and gather public input.
  - Additional efforts on labor markets and tax policy are vital to address informality and boost productivity.
  - IMF expects that, if sustained and deepened, reforms could generate significant medium-term gains, improve predictability of the regulatory and tax regime, and streamline administrative procedures; these policies need to be complemented by governance improvements and closing infrastructure and skills gaps.

### From Diagnosis to Reforms: Productivity, Misallocation, and Policy Levers (Chapter 2.3)
- Diagnosis — two interrelated drivers of persistent productivity underperformance:
  - Misallocation of resources across firms — capital and labor not flowing to their most productive use.
  - Stagnant productivity within surviving firms — surviving firms fail to become more efficient.
- Frictions likely binding in Latin America:
  - a. Size-Based Frictions:
    - Dual-track regulatory regimes create lighter compliance for firms below size thresholds, creating incentives to remain small.
    - Firms cluster just below regulatory thresholds; stricter labor regulations apply only to firms with more than 20 salaried workers; taxpayers may split into subunits to remain below thresholds.
    - Specific simplifications and proxies noted for BRA—SIMPLES, COL—RST, MEX—RESICO, PER-RER.
  - b. Financial Frictions:
    - Credit-to-GDP ratios in LA remain well below EM averages; concentrated banking sectors, weak creditor protection, underdeveloped risk assessment tools.
  - c. Limited Competition:
    - Weak enforcement of antitrust rules, high market entry costs, regulatory capture, high market concentration and dominant conglomerates.
- Quantitative and analytical findings:
  - Melitz and Polanec’s (2015) decomposition applied; aggregates are purchasing-power-parity GDP-weighted averages.
  - In the TFP growth analysis, results are driven by Brazil and Mexico.
  - LA5 = Latin America 5 (BRA, CHL, COL, MEX, PER).
  - Labor regulation threshold: stricter rules apply only to firms with more than 20 salaried workers.
  - PER-RER simplified regime: statutory monthly revenue-based quota of 1.5 percent.
- Policy levers recommended:
  - Size-based frictions:
    - Gradual phasing out of size-based thresholds.
    - Introduction of smoother compliance regimes.
  - Financial frictions:
    - Expand credit information systems.
    - Improve legal frameworks for creditor rights.
    - Encourage stronger bank competition.
    - Promote fintech solutions and digital credit platforms.
  - Competition frictions:
    - Strengthen antitrust bodies.
    - Streamline business registration.
    - Enhance transparency in public procurement.
- Expected outcomes:
  - Tackling core frictions can unlock firm dynamism, support stronger productivity growth, foster stronger growth, unlock the full potential of human and capital resources, and support income convergence with AEs.
- Case studies of successful reforms:
  - New Zealand (mid-1980s):
    - Private sector credit increased from about 50 to about 115 percent of GDP after reform.
    - Foreign direct investment inflows rose from 1.3 to 4.5 percent of GDP.
  - Peers: Estonia, Peru (1990s) — deregulation, digital governance, labor reforms, and financial deepening shown to boost firm dynamism.

### Preserving Hard-Won Monetary Policy Gains amid Persistent Fiscal Risks (Chapter 3) — Interactions, Evidence, and Policy Guidance
- Central bank independence (CBI) reforms and outcomes:
  - Reforms since the 1990s increased CBI across LAC; empirical evidence (sample period 1980–2023) indicates increased independence was associated with lower long-term inflation levels in LAC compared to other EMDEs.
  - Quantile analysis: coefficients on the CBI index decline across inflation quantiles and become notably more negative at higher inflation levels; relationship larger in LAC than in EMDEs.
  - Remaining weaknesses include inadequate capitalization for several central banks and lack of practical discretionary arrangements; some central banks still lack budgetary determination autonomy for staff compensation.
- Interactions between monetary and fiscal policy:
  - Fiscal policy affects inflation and monetary policy efficacy via debt levels, fiscal stance, local-currency bond spreads, inflation expectations, and exchange rate risk premium.
  - High debt amplifies aggregate demand through wealth effects and raises the risk that central banks accommodate fiscal needs.
  - In EMs with low debt, monetary tightening is effective in reducing inflation and lowering long-term yields; in high-debt EMs (debt higher than the 80th percentile), monetary policy shocks have no significant impact on exchange rates, short-term inflation expectations, and long-term yields.
  - A 100-basis-point monetary policy tightening shock at an 18-month horizon shows materially different responses between low-debt and high-debt samples.
  - Taylor-rule estimations show the policy rate responds more to inflation in low-debt economies compared to high-debt economies.
- Policy mix and fiscal stance effects:
  - Pandemic onset: both monetary and fiscal policies expansionary; monetary policy tightened in 2021–2022 while fiscal consolidations were delayed.
  - Fiscal policy has remained expansionary in several countries, which may have slowed disinflation despite restrictive monetary policy.
  - Local projections: a surprise increase in structural primary deficits pushes inflation and inflation expectations up at one- and two-year horizons; fiscal consolidations prompt larger reductions in inflation in countries with high debt.
- Policies for preserving monetary policy gains (bullet list preserved):
  - Maintain public debt levels that do not undermine monetary policy transmission through effects on expectations and asset prices, and that preserve central banks’ ability to implement appropriate interest rate policy.
  - Credible fiscal consolidation is critical to:
    - stabilize debt,
    - create fiscal space,
    - keep monetary policy effective.
  - Strengthen fiscal frameworks and rules and introduce well-calibrated debt anchors where appropriate.
  - Further strengthen CBI by:
    - enhancing governance of central bank boards,
    - bolstering financial independence through budgetary autonomy and proper capitalization,
    - reducing monetary financing of the budget and refining mandates and governance structures.

### Selected Macroeconomic and Fiscal Aggregates (Appendix Table Summaries, data compiled through September 30, 2025)
- Real GDP Growth, Inflation (end of period), Current Account Balance (Percent of GDP) — selected aggregates:
  - North America: Real GDP Growth 2022 2.8, 2023 2.9, 2024 2.6, 2025 1.8, 2026 2.0; Inflation 2022 6.6 percent, 2023 3.4 percent, 2024 2.8 percent, 2025 2.7 percent, 2026 2.3 percent; Current Account Balance 2022 −3.4, 2023 −3.0, 2024 −3.6, 2025 −3.6, 2026 −3.3.
  - Mexico: Real GDP Growth 2022 3.7, 2023 3.4, 2024 1.4, 2025 1.0, 2026 1.5; Inflation 2022 7.8 percent, 2023 4.7 percent, 2024 4.2 percent, 2025 3.7 percent, 2026 3.0 percent; Current Account Balance 2022 −1.3, 2023 −0.7, 2024 −0.9, 2025 −0.2, 2026 −0.3.
  - United States: Real GDP Growth 2022 2.5, 2023 2.9, 2024 2.8, 2025 2.0, 2026 2.1; Inflation 2022 6.4 percent, 2023 3.2 percent, 2024 2.7 percent, 2025 2.6 percent, 2026 2.2 percent; Current Account Balance 2022 −3.8, 2023 −3.3, 2024 −4.0, 2025 −4.0, 2026 −3.6.
  - South America (aggregate): Real GDP Growth 2022 4.1, 2023 1.7, 2024 2.3, 2025 2.7, 2026 2.2; Inflation 2022 18.4 percent, 2023 24.4 percent, 2024 16.8 percent, 2025 8.0 percent, 2026 4.6 percent; Current Account Balance 2022 −2.7, 2023 −1.5, 2024 −1.1, 2025 −1.6, 2026 −1.5.
  - Latin America and the Caribbean (Memorandum): Real GDP Growth 2022 4.3, 2023 2.4, 2024 2.4, 2025 2.4, 2026 2.3; Inflation 2022 14.9 percent, 2023 17.2 percent, 2024 12.2 percent, 2025 6.5 percent, 2026 4.2 percent; Current Account Balance 2022 −2.2, 2023 −1.2, 2024 −0.9, 2025 −1.1, 2026 −1.1.
  - LAC (simple average): Real GDP Growth 2022 7.7, 2023 3.9, 2024 4.0, 2025 2.7, 2026 3.0; Inflation 2022 12.5 percent, 2023 11.6 percent, 2024 7.3 percent, 2025 5.3 percent, 2026 4.4 percent; Current Account Balance 2022 −3.6, 2023 −2.8, 2024 −2.3, 2025 −3.6, 2026 −4.2.
- General government fiscal indicators (selected aggregates):
  - North America (aggregate) — General Government Gross Debt (Percent of GDP): 2022 114.4, 2023 114.8, 2024 117.6, 2025 120.4, 2026 123.5.
  - United States — Gross Debt: 2022 119.1, 2023 119.8, 2024 122.3, 2025 125.0, 2026 128.7.
  - Mexico — Gross Debt: 2022 53.8, 2023 52.6, 2024 58.3, 2025 58.9, 2026 59.9.
  - Latin America and the Caribbean (Memorandum) — Gross Debt: 2022 67.9, 2023 73.5, 2024 69.8, 2025 72.6, 2026 73.2.
  - LAC (simple average) — Gross Debt: 2022 69.3, 2023 68.9, 2024 66.8, 2025 66.7, 2026 62.1.
- Data coverage and caveats:
  - Data compiled based on information available through September 30, 2025.
  - Regional aggregates definitions and country-specific fiscal coverage differences are specified for comparability (selected country notes included in source).

*Italic: Source — Regional Economic Outlook: Western Hemisphere, October 2025 (text excerpts and references).*

### references.

### References

### Identifiers
- ISBN: 9798229025065 ( paper)  
- ISBN: 9798229025119  (ePub)  
- ISBN: 9798229025133  (Web PDF)

### Subjects and Classification
- LCSH: Economic forecasting—Western Hemisphere. | Economic development—Western Hemisphere. | Western Hemisphere—Economic conditions.  
- LCC: HC95.R44 2025

### Publication note
- The Regional Economic Outlook: Western Hemisphere is published once a year, in the fall, to review developments in Latin America and the Caribbean. Both projections and policy considerations are those of the IMF staff and do not necessarily represent the views of the IMF, its Executive Board, or IMF Management.  
- This report reflects developments and staff projections available through September 30, 2025.

### Errata
- November 5, 2025  
  - This web version of the October 2025 Regional Economic Outlook: Western Hemisphere has been updated to reflect the following changes to the PDF published online on October 17, 2025:  
    - The scale on the right axis of Figure 3.3, panel 3 has been adjusted by a factor of 100.  
    - The formula in footnote 2 of Figure 3.3 has been corrected due to a typographical error in the original version.

### Publication orders and contact information
- Publication orders may be placed online, by fax, or through the mail:  
  - International Monetary Fund, Publication Services  
    - P.O. Box 92780, Washington, DC 20090 (USA)  
    - T. +(1) 202.623.7430  
    - F. +(1) 202.623.7201  
    - publications@IMF.org  
    - www.IMFbookstore.org  
    - www.elibrary.IMF.org

### Contents (main headings and sections)
- 1. Navigating a Shifting Global Environment  
  - 1.1. Global Economy  
  - 1.2. Recent Economic Developments in Latin America and the Caribbean  
  - 1.3. Policies  
  - 1.4. Outlook and Risks  
  - 1.5. Policy Recommendations
- 2. Fostering Growth through Business Dynamism  
  - 2.1. Introduction  
  - 2.2. A Deeper Understanding of the Dual Productivity Challenge  
  - 2.3. From Diagnosis to Reforms: Linking Productivity to Underlying Frictions
- 3. Preserving Hard-Won Monetary Policy Gains amid Persistent Fiscal Risks  
  - 3.1. Introduction  
  - 3.2. Central Bank Reforms  
  - 3.3. Interactions between Monetary and Fiscal Policy  
  - 3.4. Policies for Preserving Hard-Won Gains
- Country Notes  
- References

### Boxes (selected)
- 1.1. Spillovers and Transmission Channels of Policy Shifts  
- 1.2. CAPDR in Changing Migration and Trade Policy Environments  
- 1.3. The Caribbean: Navigating External Uncertainties with Fiscal Resilience  
- 1.4. Latin America 8 and Other South American Countries: Country Focus  
- 1.5. Argentina’s Structural Reform Agenda  
- 2.1. Successful Reforms in Reviving Business Dynamism: New Zealand and Peers

### Figures (selected)
- Figure 1.1. Uncertainty Indicators  
- Figure 1.2. Tariffs, Exports, and Spreads  
- Figure 1.3. LAC: Currency Appreciation and Macroeconomic Developments  
- Figure 1.4. Selected Economic Indicators  
- Figure 1.5. Inflation Developments  
- Figure 1.6. Selected Fiscal Indicators and Recent Monetary Policy Actions  
- Figure 1.7. Output Gap and Inflation Gap, 2024–26  
- Figure 1.8. Growth and Inflation Risks  
- Figure 1.9. Fiscal Consolidation  
- Figure 1.10. Central Bank Independence and Monetary Policy  
- Figure 1.11. Total Factor Productivity and Trade Integration  
- Figure 1.12. Uncertainty and Effect on Real GDP by Domestic Vulnerabilities, Two Years After Shock  
- Figure 2.1. Latin America’s Dual Productivity Challenge: TFP Levels, Growth, and Sectoral Gaps  
- Figure 2.2. TFP Losses from Misallocation  
- Figure 3.1. LAC Countries with High Inflation and in Crisis  
- Figure 3.2. LAC: Overall Fiscal Balance and Government Debt  
- Figure 3.3. Central Bank Reforms

### Tables and Appendices
- Appendix Table 1.1. Western Hemisphere: Main Economic Indicators  
- Appendix Table 1.2. Western Hemisphere: Main Fiscal Indicators

### Acknowledgments (key contributors and coordination)
- Prepared by the Western Hemisphere Department (WHD) under the general direction of Rodrigo Valdés, Director, WHD, and Nigel Chalk, Deputy Director, WHD.  
- Report directed and supervised by Esteban Vesperoni, Division Chief, WHD, and Lusine Lusinyan, Deputy Division Chief, WHD.  
- Chapter 1 co-leads and contributors: Camila Casas (co-lead), Eric Huang, Genevieve Lindow, Juan Treviño (co-lead); boxes and contributions by Juan Pablo Celis, Alexander Culiuc, Manuel Escobar, Alfredo Alvarado, Junghwan Mok, Peter Nagle, Jongsoon Shin, Spencer Siegel, WHD country teams, Tannous Kass-Hanna.  
- Chapter 2 leads and contributors: Olusegun A. Akanbi, Armine Khachatryan (co-lead), Nils H. Lehr (co-lead), Nicolás Gómez Parra; inputs from Francisco Cabezón and Federico Díez.  
- Chapter 3 leads and contributors: Agnese Carella, Dimitris Drakopoulos (co-lead), Juan Passadore (co-lead), Genevieve Lindow; inputs from Sophia Chen and Francisco Arizala.  
- Research support and production: Genevieve Lindow, Nicolás Gómez Parra, Joan Thangaraj, Cheryl Toksoz.  
- Translations (Spanish and Portuguese) led by Vanesa Demko, Eric Fernandes Macedo, Carlos Viel, Maria Celeste Braschi, Susana Varela Braga, Emilia Soto Galindo; reviewed by Camila Casas, Nicolás Gómez Parra, Gabriel Hegab, Rafael Machado Parente, Juan Passadore, Roberto Perrelli, Juan Treviño.

### Country groupings
- Caribbean: Commodity Exporters (CARCE) — Guyana, Suriname, Trinidad and Tobago  
- Caribbean: Non-Tourism Dependent (CARNT) — Guyana, Haiti, Suriname, Trinidad and Tobago  
- Caribbean: Tourism Dependent (CARTD) — Antigua and Barbuda, Aruba, The Bahamas, Barbados, Belize, Dominica, Grenada, Jamaica, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines  
- Central America, Panama, and the Dominican Republic (CAPDR) — Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Nicaragua, Panama  
- Eastern Caribbean Currency Union (ECCU) — Anguilla, Antigua and Barbuda, Dominica, Grenada, Montserrat, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines  
- Latin America 7 (LA7) — Brazil, Chile, Colombia, Mexico, Paraguay, Peru, Uruguay  
- Latin America 8 (LA8) — Argentina, Brazil, Chile, Colombia, Mexico, Paraguay, Peru, Uruguay  
- South America (SA) — Bolivia, Brazil, Chile, Colombia, Ecuador, Paraguay, Peru, Uruguay, Venezuela

### List of country abbreviations (selected)
- ATG Antigua and Barbuda  
- ABW Aruba  
- BHS The Bahamas  
- BRB Barbados  
- BLZ Belize  
- BOL Bolivia  
- BRA Brazil  
- CAN Canada  
- CHL Chile  
- COL Colombia  
- CRI Costa Rica  
- DMA Dominica  
- DOM Dominican Republic  
- ECU Ecuador  
- SLV El Salvador  
- GRD Grenada  
- GTM Guatemala  
- GUY Guyana  
- HTI Haiti  
- HND Honduras  
- JAM Jamaica  
- MEX Mexico  
- NIC Nicaragua  
- PAN Panama  
- PRY Paraguay  
- PER Peru  
- PRI Puerto Rico  
- KNA St. Kitts and Nevis  
- LCA St. Lucia  
- VCT St. Vincent and the Grenadines  
- SUR Suriname  
- TTO Trinidad and Tobago  
- USA United States  
- URY Uruguay  
- VEN Venezuela

*October 2025 Regional Economic Outlook: Western Hemisphere — References (text - references).*

### 2. EMBIG Sovereign Spreads

### 2. EMBIG Sovereign Spreads

### Index baseline and data sources
- Index: January 1, 2025 = 100.
- Sources: Bloomberg Finance L.P.; IMF, Direction of Trade Statistics database; IMF, World Economic Outlook database; and IMF staff calculations.

### Regional macroeconomic context and EMBIG implications
- Currencies rebounded after initial depreciation, bond yields declined and exhibited greater differentiation across countries, and commodity prices stabilized.
- Empirical evidence points to lags in the effect of global uncertainty on growth in the region (Online Annex 1).
- Activity surprised to the upside in several LAC countries early in the year; export contribution to growth increased driven by copper and manufacturing exports (Chile, Mexico) and agricultural output (Argentina, Brazil, Colombia, Uruguay).
- Recent US dollar depreciation may be tempering effects of shocks by reducing inflationary pressures.

### Inflation developments and monetary policy
- Inflation convergence toward targets continues, though at a slower pace since early 2024.
- Headline inflation status by country examples:
  - Broadly stable around the target in Peru and Paraguay.
  - Continued to fall in Chile and Uruguay.
  - Picked up in Brazil and Mexico in early 2025.
  - After a decline in the first half of 2025, inflation edged up in Colombia.
  - Argentina has continued to make progress in the context of its stabilization program.
- Core inflation: after declining rapidly from its 2022 peak, core goods and core services inflation rose slightly in the region in 2025.
- Imported inflation pressures are gradually receding as currencies strengthen.
- Monetary policy actions:
  - Mexico continued its easing cycle that started in early 2024.
  - Chile, Colombia, Peru, and Uruguay resumed easing after pausing and/or pivoting in early 2025.
  - Brazil pivoted toward tightening in early 2025.
  - Paraguay stayed on hold.
- Monetary policy guidance:
  - A continued cautious, data-driven approach is warranted given heightened uncertainty and inflation expectations that are stable but remain above target.
  - Note: simulations in fiscal charts adjust nominal rates by "100 basis points" for sensitivity analysis.

### Fiscal positions, debt dynamics, and calibration needs
- Most countries are expected to strengthen fiscal positions in 2025, but public debt ratios continue to increase and have reached or surpassed pandemic peaks in some countries.
- Primary balance improvements reflect revenue upticks (including tax administration improvements in Paraguay) and expenditure restraint; however, many planned measures remain to be identified or enacted.
- Debt-stabilizing requirement:
  - Assuming financing costs in line with long-term trends, primary balances needed to stabilize LA7 debt at the current levels are, on average, about "1½ percentage points of GDP" higher than the 2024 outcomes.
- Exchange-rate shock effect on debt:
  - A one-standard-deviation shock to the real exchange rate could decrease LA7 debt by about "four percentage points of GDP" over the next five years (IMF 2024a).
- Fiscal policy has been expansionary amid tight monetary policy since 2022; structural primary balances for 2025 and 2026 are projected to be lower than anticipated in October 2024.

### Growth outlook and risks
- Growth projections:
  - LAC growth is projected at "2.4 percent in 2025", moderating to "2.3 percent in 2026".
  - Caribbean economies (excluding Guyana and Haiti) are expected to grow "1.9 percent in 2025 and 2026".
- Inflation projections:
  - Inflation in LAC (excluding Argentina and Venezuela) is expected to remain broadly stable at "4.3 percent in 2025", resuming its downward trend to reach "3.5 percent in 2026".
  - CAPDR inflation: "2.2 percent in 2025 and 3.3 percent next year".
- Country-specific cyclical notes:
  - Brazil and Mexico: positive output gaps expected to narrow.
  - Chile: output gaps remain broadly balanced.
  - Mexico: deceleration in 2025 due to fiscal consolidation and still-restrictive monetary policy; recovery in 2026 expected with less restrictive policies.
  - Peru and Uruguay: moderation after strong 2024 recovery.
  - Paraguay: momentum continues in 2025 and moderates in 2026.
  - Colombia: pick-up in 2025, moderation in 2026.
  - Argentina: domestic demand supports growth in 2025; moderation in 2026.
- Medium-term: LAC medium-term growth expected to be about "2½ percent annually", close to its low historical average.
- Risk assessment:
  - Risks to growth are tilted to the downside (global slowdown, heightened policy uncertainty, tighter financial conditions, higher trade barriers/shipping costs, natural disasters, tighter-than-expected domestic policies).
  - Risks to inflation are more balanced (persistent services inflation, higher labor costs, delays in fiscal consolidation vs. demand shocks and trade-policy-driven disinflation). Exchange rate and commodity price movements present bidirectional risks.

### Policy recommendations
- Fiscal consolidation is critical and cannot be further delayed:
  - Rebuild buffers, reduce debt, and support inflation convergence and inflation expectations.
  - Address spending inefficiencies and implement growth-friendly revenue mobilization to protect investment and social spending.
  - Anchor fiscal policy within credible multiyear frameworks underpinned by clear rules.
- Monetary policy:
  - Remain cautious and data-driven to bring inflation back to targets while avoiding undue pressure on activity.
  - Preserve and strengthen monetary policy frameworks, central bank independence, capitalization, and governance.
  - Allow exchange rates to absorb shocks where feasible; use IMF Integrated Policy Framework guidance for FX interventions when warranted to address financial stability risks.
- Structural reforms:
  - Advance reforms to lift potential growth and productivity, address resource misallocation, and improve firm-level productivity (constraints include size-based policies, financial constraints, and limited competition).

*International Monetary Fund — Regional Economic Outlook: Western Hemisphere (October 2025), chapter content on EMBIG Sovereign Spreads*

### 1. LA7: Monetary and Fiscal Policies

### 1. LA7: Monetary and Fiscal Policies

### Monetary policy effectiveness and central bank independence
- Central bank independence (CBI) has helped to reduce inflation; response of inflation to changes in CBI is expressed as cumulative change of 100 × log CPI over a 10-year horizon (Figure 1.10, panel 1).
- A 100-basis-point monetary policy tightening shock produces observable responses at an 18-month horizon:
  - Shock magnitude: 100 basis points.
  - Variables reported at 18-month horizon include Inflation, Exchange rate (logs; increase = depreciation), Long-term yields (LT yields), and Inflation expectations (Infl. exp.) (Figure 1.10, panel 2).
- Monetary policy is highly effective in low-debt economies relative to high-debt economies; interaction specification uses an indicator for countries with debt higher than the 80th percentile.
- Local projection controls include: one lag of output gap, transformed CPI inflation, exchange rate regime, general government gross debt, a fiscal rule indicator, and US inflation.

### Fiscal policy stance and consolidation
- LA7 is a simple average for Brazil, Chile, Colombia, Mexico, Paraguay, Peru, Uruguay (LA7 = Latin America 7).
- Structural primary balance figure axis values shown include: 0.5, −3.5, −3.0, −2.5, −2.0, −1.5, −1.0, −0.5, 0 (Percent of potential GDP).
- Note on country-specific structural balance definitions:
  - Chile: central government’s structural non-mining primary balance.
  - Colombia: consolidated public sector’s structural non-oil primary balance.
  - Peru: nonfinancial public sector’s structural primary balance.
- The material notes that consolidation has been further delayed (caption/context associated with structural primary balance and policy rate gap charts).

### Productivity, resource misallocation, and trade integration
- Low productivity growth in LAC partly reflects resource misallocation; Figure 1.11, panel 1 shows TFP losses from resource misallocation measured in percentage points (scale includes 0, −10, −20, −30, −40, −50).
- Trade integration in LAC is low and constraining growth:
  - Intra-regional trade is between 40 and 50 percent lower than in regions with similar economic and geographic characteristics (text summary referencing Figure 1.11, panel 2).
- Trade integration measures and notes:
  - ESI = export similarity index; LAC = Latin America and the Caribbean; MEX = Mexico; TFP = total factor productivity.
  - Percent difference in each region’s trade flows relative to non-LAC trade flows is conditional on population, GDP, distance, border, common language, and landlocked status.
  - Significance markers in figures: ***p < 1%, **p < 5%, *p < 10%, +p < 20%.

### Channels, vulnerabilities, and uncertainty
- Uncertainty effects on real GDP are more contained with stronger institutions and lower debt (Figure 1.12).
  - Indicators shown include Inflation volatility, Debt, Control of corruption with response magnitudes on a scale including −3, −2, −1, 0, 1.
- Box 1.1 highlights heterogeneity in transmission of policy shocks across LAC:
  - Trade structure, commodity dependence, reliance on global capital markets, and remittances matter for propagation.
  - LAC participation in GVCs is lower than peers; Mexico exhibits higher backward participation (use of imported inputs).
  - Dependence on commodities can amplify terms-of-trade shocks.
  - Estimated immediate impact of uncertainty on growth is limited but becomes increasingly negative over time.
  - A rise in uncertainty can tighten financial conditions, increasing price volatility and risk premiums.
  - Overall, recent policy shifts and higher uncertainty are likely to be negative for LAC growth; effects on inflation are ambiguous but likely deflationary on balance (negative demand shock from global slowdown and US dollar depreciation vs. potential supply shocks for countries integrated with the United States).
- Box 1.1 analytical details:
  - Local projection of cumulative change of 100 × log CPI used for CBI analysis.
  - Monetary policy shock local projections use specification ΥC,t+h − ΥC,t = aC + dt + bI It + gI Interaction it × It + uit.
  - Sample for monetary policy shocks includes: Brazil, Chile, Colombia, Egypt, Hungary, India, Indonesia, Malaysia, Mexico, Nigeria, Peru, Philippines, Poland, Romania, Russia, South Africa, Thailand, Türkiye.

### CAPDR: growth, remittances, and trade risks (Box 1.2)
- CAPDR (Central America, Panama, and the Dominican Republic) growth and projections:
  - Real GDP growth eased in 2024 to 3.6 percent.
  - Growth is projected to ease further to 3.4 percent in 2025–26.
- Inflation and remittances in CAPDR:
  - Inflation projected to remain broadly unchanged from 2024, with sharper disinflation expected in Nicaragua and a rise in inflation in Costa Rica toward the 3 percent target, from very low levels.
  - Remittances accelerated in the first half of 2025 (January–August 2025 growth was much higher than in 2024). The rise primarily reflected larger per-transfer amounts in El Salvador and Nicaragua.
  - Remittances are projected to unwind and decline (especially as a percent of GDP) from 2026 onward amid US migration policy tightening.
  - US policy actions noted: termination of the parole program for Nicaragua, and termination of Temporary Protected Status for Nicaragua and Honduras; IMF staff estimates show increased repatriations from the United States to CAPDR in 2025, particularly starting in May.
- CAPDR trade exposure and tariff context:
  - The United States is the largest market for CAPDR: exports constitute between a third and a half of all exports, accounting for 4–21 percent of GDP (except Panama, where goods exports are a small share of GDP).
  - Most CAPDR countries (except Costa Rica and Nicaragua) face the baseline 10 percent tariff in the US market; announced tariffs as of August 7, 2025 are 15 percent for Costa Rica and 18 percent for Nicaragua.
  - A significant share of products CAPDR exports to the United States are also exported by Mexico and are covered by the US-Mexico-Canada Agreement (USMCA). CAPDR producers are not deeply integrated in USMCA-based supply chains, limiting indirect benefits from intra-USMCA trade expansion.

### Policy implications and priorities (from chapter text)
- Boost productivity by:
  - Eliminating barriers to factor reallocation and financing frictions that hinder firm expansion.
  - Removing policy distortions such as subsidies and differential tax treatment to strengthen incentives for firm growth.
- Deepen trade integration by:
  - Capitalizing on opportunities to deepen global integration and foster trade diversification.
  - Improving transport- and customs-related infrastructure and addressing governance and capacity constraints.
  - Streamlining regulatory frameworks and pursuing trade agreements to boost integration, investment, and growth.
- Strengthen policy frameworks and governance to:
  - Mitigate negative impacts of uncertainty.
  - Improve security, curtail money laundering, and combat financing of terrorism to boost investment, productivity, and long-term growth.

*Italic: Source — text - 1. LA7: Monetary and Fiscal Policies (PDF chapter/section), Regional Economic Outlook—Western Hemisphere, October 2025, INTERNATIONAL MONETARY FUND.*

### 1. Remittances to CAPDR and

### 1. Remittances to CAPDR and US Unemployment Rate

### CAPDR: Remittances and Repatriations Developments
- Remittances growth points to precautionary savings being transferred in 2025, rather than changes in US labor market.
- The latest data suggest that repatriations are trending upward, although they are still below their 2022 high.
- Box Figure title: CAPDR: Remittances and Repatriations Developments.
- Geographic coverage note: Includes the Dominican Republic, El Salvador, Guatemala, Honduras, and Nicaragua. CAPDR = Central America, Panama, and the Dominican Republic.

### Data definitions and measurement notes
- Remittances: Seasonally adjusted. For Nicaragua, data for May is estimated by IMF staff. Remittances data for June to August 2025 excludes Nicaragua.
- Repatriations: Include administrative and enforcement returns, removals and Title 42 expulsions.
- Estimation approach for 2025 repatriations:
  - Since December 2024, repatriations are estimated using ICE book-ins.
  - The repatriations-to-book-ins ratio is calculated through November 2024 and projected to remain constant.
  - Since data for book-ins are published through August 2025, this allows to estimate the repatriations in 2025.

### Implications highlighted
- The pattern of remittances in 2025 is interpreted as precautionary saving behavior by CAPDR households rather than a reflection of US labor market conditions.
- Rising repatriations may indicate increased enforcement or return flows, but levels remain below the peak observed in 2022.

*Sources: National authorities; US Bureau of Labor Statistics; US Department of Homeland Security; US Immigration and Customs Enforcement (ICE); and IMF staff calculations.*

### Box 1.5. Argentina’s Structural Reform Agenda

### Box 1.5. Argentina’s Structural Reform Agenda

### Background
- Argentina faced substantial structural impediments to growth that worsened during 2010–22, resulting from:
  - harsh restrictions and heavy price, interest rate, and foreign exchange (FX) controls;
  - stringent product and labor market regulations that discouraged formal employment and increased the cost of doing business;
  - a deterioration in regulatory quality, government effectiveness, and overall governance and transparency.
- Box Figure 1.5.1 (Evolution of Structural Gaps) indicates wider gaps in Business regulation, Credit market, External sector, Governance, and Labor market relative to Emerging Markets Frontier (a longer distance from the origin denotes a wider gap).

### Core Reform Areas
- Trade Liberalization
  - Reduced numerous (and highly discretionary) tariff and non-tariff trade barriers.
  - Eased most FX restrictions (although some were reintroduced recently).
  - Simplified customs procedures through digitalization.
  - Better aligned regulations with international norms.
  - A new investment regime (RIGI) has secured commitments of over 15 billion dollars in foreign direct investment (FDI), primarily in energy and mining.
- Financial Deregulation
  - Removed interest rate controls on loans and deposits to foster credit and investment and improve monetary policy transmission.
  - Introduced new financial instruments.
  - The securities regulator shifted focus to market-friendly post-issuance oversight, making capital markets more accessible.
- Product Market Deregulation
  - Repealed or amended over 1,000 regulations across key sectors such as oil, gas, mining, electricity, transportation, retail, and real estate to remove market distortions, reduce administrative burdens, and enhance competition.
- Labor Market Modernization
  - Updated regulations to permit sectoral collective bargaining.
  - Simplified the tax system for independent workers.
  - Extended the trial periods for new hires as a first step toward improving labor market flexibility.
- State Transformation
  - Issued numerous regulations enabling the streamlining of public entities, the closing of trust funds, and the conversion of state-owned enterprises to joint-stock companies ahead of their privatization.
  - Modernized administrative processes.
  - Implemented a civil service reform to increase efficiency, reduce intervention, and improve transparency.

### Ongoing Agenda and Outlook
- After the expiration of delegated executive powers in July 2025, the administration launched the “Zero Bureaucracy” initiative to further reduce red tape and gather public input to further reduce regulatory burdens.
- Additional efforts to reform labor markets and tax policy are seen as vital for addressing informality and boosting productivity.
- The IMF expects that, if sustained and deepened, these reforms could:
  - generate significant medium-term gains by opening Argentina’s economy;
  - improve the quality and predictability of the regulatory and tax regime;
  - streamline administrative procedures.
- These policies will need to be complemented by efforts to address governance weaknesses and to close critical infrastructure and skills gaps.
- See Box 5 of IMF (2025f) for a discussion on the potential output gains from structural reforms.

*Author: Tannous Kass-Hanna.*

### 2.3 From Diagnosis to Reforms:

### 2.3 From Diagnosis to Reforms: Linking Productivity to Underlying Frictions

### Diagnosis: Drivers of Persistent Productivity Underperformance
- Two interrelated drivers behind LA’s persistent productivity under-performance:
  - Misallocation of resources across firms — capital and labor are not flowing to their most productive use.
  - Stagnant productivity within surviving firms — surviving firms fail to become more efficient.
- Evidence and interpretation:
  - These drivers stem from institutional, regulatory, and financial frictions (IMF 2024b, 2024e, 2024f).
  - Misallocation and firm-level stagnation reflect structural distortions—such as limited access to finance, regulatory burdens, or restricted market access—impairing firm behavior (Hsieh and Klenow 2009).
  - High-productivity firms face disproportionately high barriers that hinder growth and innovation (Restuccia and Rogerson 2008; Ayerst and others 2024).
  - Low-productivity firms persist, often shielded by subsidies, preferential (including subsidized) credit, or weak enforcement of market discipline (including toward state-owned enterprises).9
  - Result: environment undermines incentives for upgrading and slows productivity gains (Konig and others 2022).

### Frictions Likely Binding in Latin America (LA)
- a. Size-Based Frictions
  - Many countries in LA operate dual-track regulatory regimes: firms below a size threshold face lighter compliance burdens—in taxation, labor regulation, or social security contributions.
  - Intended purpose: support small enterprise survival and tackle informality.
  - Unintended consequence: create disincentives for firms to grow, discouraging productivity gains and scaling up (Guner and others 2008; Benedek and others 2017).
  - Empirical regularity: firms tend to cluster just below regulatory thresholds to avoid higher taxation and compliance costs, compressing firms’ size and limiting allocative efficiency.10
  - Specific notes in figures and annotations:
    - Simplified regimes examples and methodological notes for comparability (BRA—SIMPLES proxied by subtracting 9 percent social contribution from median SIMPLES nominal rate; MEX—RIF year-1 schedule uses 100 percent CIT discount; PER-RER statutory monthly revenue-based quota of 1.5 percent).
    - For BRA—SIMPLES, COL—RST, and MEX—RESICO, the median statutory CIT within each STR schedule by revenue bracket and/or sector is used. For comparability with the general regime’s CIT of 25 percent, after surtax, the SIMPLES CIT is proxied as described above. (CIT = corporate income tax; STR = simplified tax regime.)
  - Note: Stricter labor regulations apply only to firms with more than 20 salaried workers; taxpayers may split into subunits to remain below thresholds.2

- b. Financial Frictions
  - Financial market inefficiencies restrict firm expansion.
  - Credit-to-GDP ratios in LA remain well below EM averages, and even productive firms may lack adequate access to financing (Figure 2.4, panel 3).11
  - Binding factors in LA: concentrated banking sectors, weak creditor protection, underdeveloped risk assessment tools.
  - Theoretical and empirical context: financial frictions exacerbate misallocation by misdirecting capital away from more productive firms (Banerjee and Moll 2010; Moll 2014; Midrigan and Xu 2014; Cavalcanti and others 2024).

- c. Limited Competition
  - Weak competition prevents reallocation of market share toward more efficient producers and reduces incentives for surviving firms to innovate.
  - In LA, competition is often undermined by weak enforcement of antitrust rules, high market entry costs, and regulatory capture.
  - The region features high market concentration and presence of dominant conglomerates (Figure 2.4, panel 4).
  - When competition is weak or absent, incentives for productivity-enhancing investments diminish, reallocation forces weaken, and aggregate productivity slows (Brooks and others 2021; Armangué-Jubert and others 2025; Schiffbauer and others 2025).

### Quantitative and Analytical Findings (selected)
- TFP decomposition and drivers:
  - Melitz and Polanec’s (2015) decomposition applied; aggregates are purchasing-power-parity GDP-weighted averages; regional groupings use 2005 WEO classification.
  - In the TFP growth analysis, results are driven by Brazil and Mexico.1
- LA5 definition and indicators:
  - LA5 = Latin America 5 (BRA, CHL, COL, MEX, PER).
  - General regime CIT of 25 percent used for comparability in the tax-regime illustrations.
- Labor regulation threshold:
  - Stricter labor regulations apply only to firms with more than 20 salaried workers.
- PER-RER simplified regime:
  - PER-RER: no annual CIT, but a statutory monthly revenue-based quota of 1.5 percent.

### Policy Levers to Lift Constraints
- High-level guidance:
  - LA’s productivity challenge is deep-rooted but could be addressed through well-designed and targeted reforms.
  - Reform experiences elsewhere show targeted, well-sequenced actions in high-impact areas can deliver gains and boost business dynamism, investment, and growth.12
- Recommended reform areas and instruments:
  - Size-based frictions:
    - Gradual phasing out of size-based thresholds.
    - Introduction of smoother compliance regimes to eliminate size-based distortions (see Online Annex 2).
  - Financial frictions:
    - Expand credit information systems.
    - Improve legal frameworks for creditor rights.
    - Encourage stronger bank competition.
    - Promote fintech solutions and digital credit platforms to broaden access and reduce risk premiums.
  - Competition frictions:
    - Strengthen antitrust bodies.
    - Streamline business registration.
    - Enhance transparency in public procurement.
- Expected outcomes:
  - Tackling core frictions can unlock firm dynamism, support stronger productivity growth, foster stronger growth, unlock the full potential of human and capital resources, and support income convergence with AEs.

### Case Studies: Successful Reforms (Box 2.1)
- New Zealand (mid-1980s reforms)
  - Comprehensive and well-sequenced reforms transformed the economy from highly regulated to dynamic, enabling firm entry, growth, and innovation.
  - Reforms included trade policy, financial markets, taxation, and labor policies—enhancing competition, expanding access to credit, eliminating frictions, and bolstering productivity.
  - Productivity gains driven by both within-sector improvements and resource reallocation toward higher-productivity industries; labor productivity surged in reformed sectors such as information and telecommunications, transportation, and agriculture.
  - Financial sector outcomes:
    - Private sector credit increased from about 50 to about 115 percent of GDP after reform.
    - Foreign direct investment inflows rose from 1.3 to 4.5 percent of GDP.
- Peer examples:
  - Estonia: deregulation and digital governance enhanced transparency, reduced red tape, and fostered firm creation.
  - Peru (1990s): reforms addressed labor rigidities, boosted capital flows, and expanded financial intermediation—paralleling New Zealand’s path to strengthening business dynamism.

*Source: Regional Economic Outlook—Western Hemisphere, October 2025, International Monetary Fund.*

### 3. Preserving Hard-Won Monetary Policy Gains amid Persistent Fiscal Risks

### 3. Preserving Hard-Won Monetary Policy Gains amid Persistent Fiscal Risks

### Central bank independence (CBI) reforms and outcomes
- Reforms since the 1990s increased CBI across LAC, with legal reforms counted as a country passing a central bank reform in a year and increasing (decreasing) the CBI index.
- Empirical evidence (sample period 1980–2023) using local projections (Jordà 2005) indicates increased independence was associated with lower long-term inflation levels in LAC compared to other EMDEs.
- Quantile analysis shows the coefficients on the CBI index decline across inflation quantiles and become notably more negative at higher inflation levels; the relationship is consistently larger in LAC than in EMDEs.
- Reforms contributed to:
  - better inflation anchoring,
  - greater monetary policy effectiveness,
  - lower sacrifice ratios,
  - increased resilience.
- LA5 monetary policy frameworks strengthened credibility over the years; anchoring of inflation expectations improved since the mid-2000s.
- Remaining weaknesses in the region include inadequate capitalization for several central banks and lack of practical discretionary arrangements; some central banks still lack budgetary determination autonomy for staff compensation.

### Empirical specifications and measures
- Local projection of cumulative change of 100 times the log of CPI over a 10-year horizon regressed on CBI index; controls include one lag of output gap, transformed CPI inflation, exchange rate regime, general government gross debt, a fiscal rule indicator, and US inflation.
- Quantile regression of transformed inflation on CBI index used to assess heterogeneity across the inflation distribution.
- Seigniorage is calculated as m_{t−1}[1−(1+g_t)(1+π_t)^{-1}] where m_{t−1} is monetary base as fraction of nominal GDP, g_t growth, and π_t inflation; CB claims on government reported as percent of monetary base.

### Interactions between monetary and fiscal policy
- Fiscal policy affects inflation and monetary policy efficacy via:
  - effects of debt levels and fiscal stance on local-currency bond spreads,
  - inflation expectations,
  - exchange rate risk premium.
- High debt amplifies aggregate demand through wealth effects and raises the risk that central banks accommodate fiscal needs.
- Current regional context: debt levels and interest payments are high compared to other regions and historical standards; floating and indexed-rate debt remains substantial in some countries, increasing pass-through from monetary policy to debt-servicing costs.

### Debt levels, monetary policy effectiveness, and transmission
- Using monetary policy shocks from Checo, Grigoli, and Sandri (2024), local projections indicate:
  - In EMs with low debt levels, monetary tightening is effective in reducing inflation; it leads to exchange rate appreciation and lower short-term inflation expectations, aiding convergence to target and lowering long-term yields (reduction in risk premium).
  - In high-debt EMs (current debt higher than the 80th percentile in the past 20 years), monetary policy shocks have no significant impact on exchange rates, short-term inflation expectations, and long-term yields.
- A 100-basis-point monetary policy tightening shock at an 18-month horizon shows materially different responses between low-debt and high-debt samples in inflation, inflation expectations, exchange rates, and long-term yields.
- Taylor-rule estimations across EMs show the policy rate responds more to inflation in low-debt economies compared to high-debt economies, implying high debt may weaken central banks’ willingness or ability to tighten policy.

### Policy mix and fiscal stance effects
- At the onset of the pandemic both monetary and fiscal policies were expansionary; monetary policy was tightened significantly in 2021 and 2022 while fiscal consolidations were delayed.
- Fiscal policy has stayed expansionary in recent years in several countries, creating a policy mix that may have slowed disinflation despite restrictive monetary policy.
- Local projections for selected EMDEs suggest a surprise increase in structural primary deficits (difference between actual and the October WEO projection of the year) pushes inflation and inflation expectations up at both one- and two-year horizons.
- Fiscal consolidations prompt a larger reduction in inflation in countries with high debt (Arizala and others, forthcoming).

### Policies for preserving monetary policy gains
- Key priority: maintain public debt levels that do not undermine monetary policy transmission through effects on expectations and asset prices, and that preserve central banks’ ability to implement appropriate interest rate policy.
- Credible fiscal consolidation is critical to:
  - stabilize debt,
  - create fiscal space,
  - keep monetary policy effective.
- Strengthening fiscal frameworks and rules and introducing well-calibrated debt anchors where appropriate are recommended.
- Further strengthening of CBI remains possible by:
  - enhancing governance of central bank boards,
  - bolstering financial independence through budgetary autonomy and proper capitalization,
  - reducing monetary financing of the budget and refining mandates and governance structures.

*Source: 3. Preserving Hard-Won Monetary Policy Gains amid Persistent Fiscal Risks (October 2025), INTERNATIONAL MONETARY FUND*

### 3. Preserving Hard-Won Monetary Policy Gains amid Persistent Fiscal Risks

### 3. Preserving Hard-Won Monetary Policy Gains amid Persistent Fiscal Risks

### Real GDP Growth, Inflation, and External Balances (selected aggregates and economies)
- North America: Real GDP Growth 2022 2.8, 2023 2.9, 2024 2.6, 2025 1.8, 2026 2.0; Inflation (end of period) 2022 6.6 percent, 2023 3.4 percent, 2024 2.8 percent, 2025 2.7 percent, 2026 2.3 percent; External Current Account Balance (Percent of GDP) 2022 –3.4, 2023 –3.0, 2024 –3.6, 2025 –3.6, 2026 –3.3.
- Canada: Real GDP Growth 2022 4.2, 2023 1.5, 2024 1.6, 2025 1.2, 2026 1.5; Inflation 2022 6.6 percent, 2023 3.2 percent, 2024 1.9 percent, 2025 2.0 percent, 2026 2.1 percent; Current Account Balance 2022 –0.3, 2023 –0.6, 2024 –0.5, 2025 –1.4, 2026 –1.3.
- Mexico: Real GDP Growth 2022 3.7, 2023 3.4, 2024 1.4, 2025 1.0, 2026 1.5; Inflation 2022 7.8 percent, 2023 4.7 percent, 2024 4.2 percent, 2025 3.7 percent, 2026 3.0 percent; Current Account Balance 2022 –1.3, 2023 –0.7, 2024 –0.9, 2025 –0.2, 2026 –0.3.
- United States: Real GDP Growth 2022 2.5, 2023 2.9, 2024 2.8, 2025 2.0, 2026 2.1; Inflation 2022 6.4 percent, 2023 3.2 percent, 2024 2.7 percent, 2025 2.6 percent, 2026 2.2 percent; Current Account Balance 2022 –3.8, 2023 –3.3, 2024 –4.0, 2025 –4.0, 2026 –3.6.
- South America (aggregate): Real GDP Growth 2022 4.1, 2023 1.7, 2024 2.3, 2025 2.7, 2026 2.2; Inflation 2022 18.4 percent, 2023 24.4 percent, 2024 16.8 percent, 2025 8.0 percent, 2026 4.6 percent; Current Account Balance 2022 –2.7, 2023 –1.5, 2024 –1.1, 2025 –1.6, 2026 –1.5.
- Latin America and the Caribbean (Memorandum): Real GDP Growth 2022 4.3, 2023 2.4, 2024 2.4, 2025 2.4, 2026 2.3; Inflation 2022 14.9 percent, 2023 17.2 percent, 2024 12.2 percent, 2025 6.5 percent, 2026 4.2 percent; Current Account Balance 2022 –2.2, 2023 –1.2, 2024 –0.9, 2025 –1.1, 2026 –1.1.
- LAC (simple average): Real GDP Growth 2022 7.7, 2023 3.9, 2024 4.0, 2025 2.7, 2026 3.0; Inflation 2022 12.5 percent, 2023 11.6 percent, 2024 7.3 percent, 2025 5.3 percent, 2026 4.4 percent; Current Account Balance 2022 –3.6, 2023 –2.8, 2024 –2.3, 2025 –3.6, 2026 –4.2.

### General Government Fiscal Indicators (selected aggregates and economies)
- North America (aggregate): General Government Primary Expenditure (Percent of GDP) 2022 33.4, 2023 33.7, 2024 33.8, 2025 33.4, 2026 33.4; General Government Primary Balance (Percent of GDP) 2022 –0.8, 2023 –4.0, 2024 –4.1, 2025 –3.4, 2026 –3.6; General Government Gross Debt (Percent of GDP) 2022 114.4, 2023 114.8, 2024 117.6, 2025 120.4, 2026 123.5.
- United States: Primary Expenditure 2022 33.7, 2023 34.1, 2024 34.0, 2025 33.6, 2026 33.6; Primary Balance 2022 –1.0, 2023 –4.7, 2024 –4.6, 2025 –3.8, 2026 –4.1; Gross Debt 2022 119.1, 2023 119.8, 2024 122.3, 2025 125.0, 2026 128.7.
- Canada: Primary Expenditure 2022 37.9, 2023 38.9, 2024 41.2, 2025 41.1, 2026 41.0; Primary Balance 2022 0.2, 2023 0.3, 2024 –1.9, 2025 –1.9, 2026 –2.0; Gross Debt 2022 104.2, 2023 107.7, 2024 111.3, 2025 113.9, 2026 113.0.
- Mexico: Primary Expenditure 2022 23.2, 2023 22.3, 2024 23.8, 2025 22.3, 2026 22.2; Primary Balance 2022 0.7, 2023 1.5, 2024 0.2, 2025 1.5, 2026 1.6; Gross Debt 2022 53.8, 2023 52.6, 2024 58.3, 2025 58.9, 2026 59.9.
- South America (aggregate): Primary Expenditure 2022 32.5, 2023 33.4, 2024 32.5, 2025 32.9, 2026 32.7; Primary Balance 2022 0.1, 2023 –1.9, 2024 –0.5, 2025 –0.7, 2026 –0.3; Gross Debt 2022 75.2, 2023 85.3, 2024 77.7, 2025 81.5, 2026 82.5.
- Latin America and the Caribbean (Memorandum): Primary Expenditure 2022 28.8, 2023 29.0, 2024 28.7, 2025 28.6, 2026 28.2; Primary Balance 2022 0.3, 2023 –0.8, 2024 –0.3, 2025 0.0, 2026 0.3; Gross Debt 2022 67.9, 2023 73.5, 2024 69.8, 2025 72.6, 2026 73.2.
- LAC (simple average): Primary Expenditure 2022 25.6, 2023 25.5, 2024 25.4, 2025 25.5, 2026 24.4; Primary Balance 2022 –0.2, 2023 –0.1, 2024 0.0, 2025 –0.6, 2026 0.2; Gross Debt 2022 69.3, 2023 68.9, 2024 66.8, 2025 66.7, 2026 62.1.

### Country Notes, Data Coverage, and Caveats (selected)
- Data in tables compiled based on information available through September 30, 2025.
- Regional output growth aggregates are purchasing-power-parity GDP-weighted averages. CPI inflation aggregates exclude Venezuela and are geometric purchasing-power-parity GDP-weighted averages. Current account aggregates are US dollar nominal GDP-weighted averages.
- Country-specific coverage differences for fiscal series:
  - Bahamas, The: Coverage of fiscal series is central government.
  - Barbados: Overall and primary balances cover budgetary central government; gross debt covers central government debt, central government guaranteed debt, and arrears.
  - Belize, Bolivia, Guatemala, Haiti, Guyana, Jamaica, Trinidad and Tobago: various central government or nonfinancial public sector coverages specified.
  - Bolivia: Projections for 2026–30 have been omitted due to significant uncertainty regarding the economic outlook.
  - Brazil: Nonfinancial public sector reported excluding Petrobras and Eletrobras and consolidated with the Sovereign Wealth Fund; national definition of general government gross debt includes Treasury securities used for monetary policy purposes by the central bank.
  - Colombia: Nonfinancial public sector reported for primary balances; combined public sector reported for gross public debt.
  - Costa Rica: Central government definition expanded as of January 1, 2021, to include 51 public entities; data back to 2019 adjusted for comparability.
  - Dominican Republic: Public debt, debt service, and cyclically adjusted/structural balances are for the consolidated public sector; remaining fiscal series are for the central government.
  - Ecuador: Fiscal projections for 2025–30 are excluded from publication because of ongoing program discussions; public sector gross debt includes liabilities under advance oil sales.
  - El Salvador: Primary expenditure and primary balance apply to the nonfinancial public sector; gross debt on a consolidated basis.
  - Mexico: Fiscal series coverage includes central government, social security system funds, nonfinancial public corporations, and nonmonetary public financial corporations.
  - Panama: Ratios to GDP based on the 2018-base GDP series; fiscal data cover the nonfinancial public sector excluding the Panama Canal Authority.
  - Uruguay: Coverage changed from consolidated public sector to nonfinancial public sector with October 2019 WEO; public pension transfers affected revenues and net lending/borrowing series for 2018–22.
  - Venezuela: Fiscal accounts include budgetary central government, social security, FOGADE, and a reduced set of public enterprises; data for 2018–24 are IMF staff estimates and should be interpreted with caution; Venezuela’s consumer prices are excluded from all WEO group composites.
- For cross-country comparability, US expenditure and fiscal balances exclude items related to the accrual-basis accounting of government employees’ defined-benefit pension plans; Appendix Table 1.2 US data may differ from US Bureau of Economic Analysis publications.

*Source: IMF, Regional Economic Outlook—Western Hemisphere, Appendix Tables (data compiled through September 30, 2025).*

### References

### References

### Fiscal and Monetary Theory, Price Level, and Debt
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- Calvo, John H. (not present) — (excluded: not in source)
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- Obstfeld, Maurice, and Haonan Zhou. 2023. “The Global Dollar Cycle.” NBER Working Paper 21004, National Bureau of Economic Research.
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### Productivity, Misallocation, Firm Dynamics, and Finance
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- Griliches, Zvi, and Haim Regev. 1995. “Firm Productivity in Israeli Industry 1979-1988.” Journal of Econometrics 65: 175–203.
- Hsieh, Chang-Tai, and Benjamin A. Olken. 2014. “The Missing “Missing Middle”.” Journal of Economic Perspectives 28 (3): 89–108.
- Hsieh, Chang-Tai, and Peter J. Klenow. 2009. “Misallocation and Manufacturing TFP in China and India.” Quarterly Journal of Economics 124 (4): 1403–48.
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- Midrigan, Virgiliu, and Daniel Yi Xu. 2014. “Finance and Misallocation: Evidence from Plant-Level Data.” American Economic Review 104 (2): 422–58.
- Moll, Benjamin. 2014. “Productivity Losses from Financial Frictions: Can Self-Financing Undo Capital Misallocation?” American Economic Review 104 (10): 3186–221.
- Restuccia, Diego, and Richard Rogerson. 2008. “Policy Distortions and Aggregate Productivity with Heterogeneous Establishments.” Review of Economic Dynamics 11: 707–20.
- Romelli, Davide. 2024. “Trends in Central Bank Independence: A De-jure Perspective.” BAFFI CAREFIN Centre Research Paper 217.
- Schiffbauer, Marc, James Sampi, and Javier Coronado. 2025. “Competition and Productivity: Evidence from Peruvian Municipalities.” The Review of Economics and Statistics 107 (1): 95–108.
- Fentanes, Oscar, and Santiago Levy. 2024. “Dysfunctional Firm Dynamics and Mexico’s Dismal Productivity Performance.” Economía 23 (1): 283–310.
- Camacho, Adriana, Emily Conover, and Dean Scrimgeour. 2024. “Misallocation and Manufacturing TFP in Colombia.” Economía 23 (1): 1–29.
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- Gu, Wulong, and André Hofman. 2021. “LA KLEMS Productivity Level Database: Methodology for Estimating Purchasing Power Parities of Output and Inputs and Relative Productivity Levels in Latin America.” Technical Report, LA KLEMS.
- Bontadini et al. 2023 (see above) — industry productivity with intangibles.

### Trade, Global Integration, and Uncertainty
- Bloom, Nicholas. 2014. “Fluctuations in Uncertainty.” Journal of Economic Perspectives 28 (2): 153–76.
- Caldara, Dario, Matteo Iacoviello, Patrick Molligo, Andrea Prestipino, and Andrea Raffo. 2020. “The Economic Effects of Trade Policy Uncertainty.” Journal of Monetary Economics 109:38–59.
- Díez, Federico J., Jiayue Fan, and Carolina Villegas-Sánchez. 2021. “Global Declining Competition?” Journal of International Economics 132: 103492.
- Dizioli, Allan, Jaime Guajardo, Vladimir Klyuev, Rui Mano, and Mehdi Raissi. 2016. “Spillovers from China’s Growth Slowdown and Rebalancing to the ASEAN-5 Economies.” IMF Working Paper 2016/170, International Monetary Fund, Washington, DC.
- Duval, Romain A., Kevin C. Cheng, Kum Hwa Oh, and Richa Saraf. 2014. “Trade Integration and Business Cycle Synchronization: A Reappraisal with Focus on Asia.” IMF Working Paper 2014/52, International Monetary Fund, Washington, DC.
- Bustos, Paula. 2011. “Trade Liberalization, Exports, and Technology Upgrading: Evidence on the Impact of MERCOSUR on Argentinian Firms.” American Economic Review 101 (1): 304–40.
- Forbes, Kristin, Jongrim Ha, and M. Ayhan Kose. 2025. “Tradeoffs over Rate Cycles: Activity, Inflation and the Price Level.” NBER Macroeconomics Annual, April.
- Kose, Ayhan, Csilla Lakatos, Franziska Ohnsorge, and Marc Stocker. 2017. “The Global Role of the US Economy: Linkages, Policies and Spillovers.” World Bank Policy Research Working Paper 7962.
- International Monetary Fund (IMF). 2019a. “Spillovers to Latin America from Growth Slowdowns in China and the United States” (Chapter 5). In Regional Economic Outlook: Western Hemisphere. Washington, DC, October.
- International Monetary Fund (IMF). 2023a. “External Sector Implications of the Global Dollar Cycle” (Chapter 2). In External Sector Report. Washington, DC, July.
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- Obstfeld and Zhou 2023 (see above) — The Global Dollar Cycle.

### Labor, Wages, and Market Structure
- Brooks, Wyatt J., Joseph P. Kaboski, Yao Amber Li, and Wei Qian. 2021. “Exploitation of Labor? Classical Monopsony Power and Labor’s Share.” Journal of Development Economics 150: 102627.
- Hsieh and Olken 2014; Hsieh and Klenow 2009, 2014 (see above) — firm size and labor implications.
- International Monetary Fund (IMF). 2024c. “Closing the Gap: Labor Market Participation in Latin America” (Background Paper 1). In Regional Economic Outlook: Western Hemisphere. Washington, DC, October.
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### Regional and Policy Reports, Databases, and Background Papers
- International Monetary Fund (IMF). 2019b. "Uruguay: 2018 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Republic of Uruguay." IMF Country Report 2019/064, Washington, DC.
- International Monetary Fund (IMF). 2021. “Tax Policy for Inclusive Growth in Latin America and the Caribbean” (Background Paper 1). In Regional Economic Outlook: Western Hemisphere. Washington, DC, October.
- International Monetary Fund (IMF). 2023c. “Crime and its Macroeconomic Consequences in Latin America and the Caribbean” (Online Annex 4). In Regional Economic Outlook: Western Hemisphere. Washington, DC, October.
- International Monetary Fund (IMF). 2024a. “Public Debt Dynamics in Latin America: Time to Rebuild Buffers and Strengthen Fiscal Frameworks” (Background Paper 2). In Regional Economic Outlook: Western Hemisphere. Washington, DC, October.
- International Monetary Fund (IMF). 2024b. “Rebalancing Policies and Pressing with Reforms.” In Regional Economic Outlook: Western Hemisphere. Washington, DC, October.
- International Monetary Fund (IMF). 2024e. “Slowdown in Global Medium-Term Growth: What Will It Take to Turn the Tide?” (Chapter 3). In World Economic Outlook. Washington, DC, April.
- International Monetary Fund (IMF). 2024f. “Understanding the Social Acceptability of Reforms” (Chapter 3). In World Economic Outlook. Washington, DC, October.
- International Monetary Fund (IMF). 2024g. “The Great Tightening: Insights from the Recent Inflation Episode.” In World Economic Outlook. Washington, DC, October.
- International Monetary Fund (IMF). 2025a. “Emerging Market Resilience: Good Luck or Good Policies?” (Chapter 2). In World Economic Outlook. Washington, DC, October.
- International Monetary Fund (IMF). 2025b. “Spending Smarter: How Efficient and Well-Allocated Public Spending Can Boost Economic Growth” (Chapter 1). In Fiscal Monitor. Washington, DC, October.
- International Monetary Fund (IMF). 2025c. “Global Prospects and Policies” (Chapter 1). In World Economic Outlook. Washington, DC, October.
- International Monetary Fund (IMF). 2025d. “Riding the Waves: Building Resilience in an Era of High Uncertainty” (Chapter 2). In Regional Economic Outlook: Middle East and Central Asia. Washington, DC, May.
- International Monetary Fund (IMF). 2025f. "Argentina: Request for an Extended Arrangement Under the Extended Fund Facility-Press Release; Staff Report; Staff Supplement; and Statement by the Executive Director for Argentina." IMF Country Report 2025/095, Washington, DC.
- Inter-American Development Bank. 2018. “A Mandate to Grow.” Latin American and Caribbean Macroeconomic Report.
- Inter-American Development Bank. 2024. “Ready for Take-off? Building on Macroeconomic Stability for Growth.” Latin American and Caribbean Macroeconomic Report.
- The World Bank Group. 2024. The World Bank Enterprise Survey (WBES). (version June 2025).
- Harvard Business School (Behavioral Finance and Financial Stability), Global Crises Data by Country database. https://www.hbs.edu/behavioral-finance-and-financial-stability/data/Pages/global.aspx
- Unsal, Filiz, and Chris Papageorgiou. 2023. “Emerging Markets’ Kryptonite: Inconsistencies in Monetary Policymaking.” Presented at the 2024 American Economic Association Conference, December. https://www.aeaweb.org/conference/2024/program/paper/4drHKB6d
- World Economic Forum (WEF). 2019. The Global Competitiveness Index 4.0. (version October 2019).

*International Monetary Fund. Regional Economic Outlook—Western Hemisphere. October 2025.*

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_Source: https://www.imf.org/-/media/files/publications/reo/whd/2025/october/english/text.pdf_