Latin American and Caribbean nations must radically strengthen tax collection and private sector involvement to bridge a $99bn annual sustainable financing gap, according to a comprehensive new report from leading international organisations.

The 2024 Latin American Economic Outlook, jointly produced by the OECD, UN-ECLAC, CAF-Development Bank and European Commission, calls for sweeping reforms across the region's fiscal and financial systems at a time when many countries are struggling with tight monetary policy and reduced fiscal space following the COVID-19 pandemic.

The report paints a sobering picture of the region's economic foundations. Labour productivity remains severely depressed at just 33 percent of OECD levels in 2023. While poverty has reached its lowest level in two decades at 27.3 percent, extreme poverty continues to affect one in ten people across the region, highlighting persistent inequality despite progress.

Most Latin American economies collect far less in tax than developed nations, with revenue averaging just 21.5 percent of GDP in 2022 compared to 34 percent in OECD countries. This substantial shortfall, combined with inefficient public spending heavily weighted toward short-term expenditure, has left governments with little room for policies to support growth and social development in the post-pandemic era.

The region's debt burden has grown increasingly onerous over the past decade, with debt service payments climbing from 9.8 percent of tax revenue in 2012 to 12.2 percent in 2022. In several countries, interest payments have reached alarming levels, amounting to up to twice education budgets, three times healthcare expenditure, and four times capital investment.

Financial markets across the region remain significantly underdeveloped, with domestic credit to the private sector reaching only 50 percent of GDP. The debt market is overwhelmingly dominated by public sector issuance, which accounted for 81 percent of local offerings between 2015 and 2023. This concentration hampers private sector growth and innovation, according to the report.

Access to financial services remains deeply uneven, particularly affecting informal workers and vulnerable groups. The report notes that while nearly 15 percent of formal households had access to housing loans in 2020, this figure plummeted to just 2.3 percent for informal households, highlighting the deep-rooted financial exclusion in the region.

However, sustainable finance presents a notable bright spot, with green, social and sustainability-linked bonds growing dramatically from 9.3 percent of total international issuance in 2020 to nearly 35 percent in 2023. The report advocates expanding such instruments, alongside catastrophe bonds and debt-for-nature swaps, while establishing robust frameworks to prevent greenwashing.

Development finance institutions are highlighted as crucial players in the region's developing financial landscape, though only 19 percent of their instruments currently target key priorities like green transition, gender equality and digital transformation. The report emphasises the importance of international cooperation initiatives, including the EU-LAC Global Gateway Investment Agenda, which aims to mobilise funding for infrastructure development while promoting local value creation and social cohesion.

To address these challenges, the report recommends a comprehensive reform agenda including updating regulatory frameworks, improving financial literacy, and strengthening regional integration. It calls for policies to expand institutional investor participation and enhance capital market liquidity, while also improving public spending efficiency and debt management through robust fiscal frameworks.

The region's nations are urged to coordinate their approach ahead of the UN's Fourth International Conference on Financing for Development, scheduled for mid-2025 in Seville, where they will have the opportunity to present a unified vision for sustainable development financing. This coordination will be crucial as the region seeks to overcome its significant financing challenges and move towards more sustainable and inclusive economic growth.

“The conference will enable the design of reforms to promote development financing in key areas, such as improving liquidity, measuring risk, mobilising private finance, and enhancing co‑ordination among development providers,” the OECD press release stated.