Policymakers now have a unique opportunity to implement reforms that will put the region's economies on a more resilient and inclusive growth path, without neglecting the crucial needs of citizens.

A fragile recovery

Since the onset of the pandemic, the performance of the economies of Central America, Panama and the Dominican Republic (CAPRD) has been among the best in Latin America. By 2021, only Panama's output had not surpassed pre-pandemic levels.

This strong recovery was due in part to the way in which the authorities responded, with swift, comprehensive and, in many cases, unprecedented policies, such as historic cuts in monetary policy rates to stimulate economic activity and a sharp expansion of spending on social assistance and health care. External factors have also contributed to the recovery, such as the recovery in the United States, given the region's relatively high degree of openness and dependence on remittances.

While battling the pandemic, the region was also hit by hurricanes Eta and Iota, two reminders of vulnerability to climate change; the affected countries once again responded by providing immediate support, to the population and setting reconstruction in motion.

Just as recovery was beginning to take hold in 2022, the region is now affected by the global ramifications of the war in Ukraine, most notably through fuel and food price hikes. The authorities have once again responded with spending and tax measures to protect the nascent recovery and provide support to the population, particularly the most vulnerable.

These multiple shocks are projected to have a lasting impact on the level of GDP in the region. The dent in GDP is smaller than projected in 2021, but larger than in advanced economies.

A test of resilience

The region's economic outlook is now subject to an unusually high degree of uncertainty. A possible confluence of adverse global factors could once again test the resilience of the economies, at a time when policymakers have little room for maneuver, such as in the face of higher debt levels.

Some of these other factors include increased volatility in commodity prices, as the region is highly dependent on fuel imports; weaker growth in trading partners, including the United States; tighter financing conditions due to faster global and domestic interest rate hikes, and a further moderation in remittance inflows, which are a vital lifeline for some economies.

A new and better opportunity

The region has a unique opportunity to re-launch a set of crucial reforms aimed at improving social conditions and reversing the deterioration of pre-existing problems, such as high and persistent unemployment, poverty and inequality, which have fueled migration.

Policymakers must focus on creating employment opportunities by increasing the flexibility of labor markets, especially for women and youth, who were hardest hit by the crisis, investing in climate-resilient infrastructure and boosting their digitalization programs, in both the public and private sectors, which will enhance the region's competitiveness.

The process will take time, making it all the more important to adopt sound domestic policies to improve resilience before the next shock hits.