In 2020, Latin America and the Caribbean (LAC) will experience the most severe economic recession in decades. This paper looks at the challenges confronted by LAC and proposes a series of actions in order to structure a recovery plan that minimizes potential moral hazard effects, while aligning fiscal, social and environmental sustainability priorities.

High pre-pandemic sovereign debt levels, worsening credit ratings, and low tax revenues limit the much-needed fiscal space to overcome the present health and economic crisis. Most countries in the region are at risk of losing two decades of progress in the fight against poverty and inequality, while their upper-middle-income status makes them ineligible for debt relief and aid packages from advanced economies. The focus on solving the current crisis may also delay much needed progress on climate change mitigation and adaptation efforts, as well as overall improvements in the Sustainable Development Goals.

We propose a combination of fiscal policy responses combined with new sources of financing to unlock a sharp recovery, with minimal harm to fiscal sustainability in the long run. Through expanded public-private partnerships and blended finance structures, governments should be able to leverage private financing in large job-creating undertakings. Additionally, the issuance of SDG-linked sovereign debt and Special Drawing Rights (SDRs) with SDG conditionality could also provide much needed liquidity at a low cost.