IMF warns against growing Caribbean debt

The head table at this week’s IMF Economic Outlook conference, from left: Luis Bruer, chief of the Caribbean 2 Division Western Hemisphere, Dr Delisle Worrel, Governor of the Central Bank of Barbados and David Vegara, Deputy Director, Western Hemisphere department, IMF.

The International Monetary Fund released its Regional Economic Outlook for the Western Hemisphere in Barbados on Thursday this week. David Vegara, deputy director for the Western Hemisphere Department of the IMF presented the report to regional journalists, financial experts and business people gathered at the Central Bank of Barbados.
“The entire Caribbean region has been impacted by the current slowdown in the growth of the major western hemisphere,” began moderator Harold Codrington, Deputy Governor of the Central Bank of Barbados.                 “Adjectives like ‘unprecedented’ and ‘prolonged’ have been used to describe the situation and everyone wants to know when it will end. It is against this background that the IMF is issuing this outlook.”
For his part Mr Vegara first presented a summary of the global outlook. Hardly anyone was surprised that it was more bad news. He quoted IMF director Christine Legarde who said recently “that the global economy continues to grow yet not enough.”
Vegara admitted that at recent IMF meetings the clear message was that “the global economy had entered a dangerous new phase.”
“The global economy expanded at a rate of about three quarters of a percent in the first half of 2011 compared to five and one quarter percent a year ago. The deceleration was much stronger than anyone anticipated. Policy makers are also still grappling with putting the 2008 economic crisis behind us.”
Vegara explained the report did not have very good news for regional countries that depended heavily on tourism. The report itself warns that “Countries with strong real links with advanced economies (such as Mexico and the countries of Central America and the Caribbean) are expected to be harder hit by the recent slowdown. Although the Mexican economy is more dependent on US manufacturing and trade, Central America and the Caribbean are more reliant on remittances and tourism flows, which in turn are very dependent on US labour and housing market developments. Preliminary data point to only a minor slowdown in remittances and tourism receipts so far, though some further moderation is expected, as these flows typically manifest themselves with some lag. That said, remittances and tourism flows remain well below those observed prior to the crisis.”
Specific to the Caribbean Vegara forecasted that tourism intensive economies are projected to expand by one and a quarter percent in 2011-2012, almost a full one percent lower than had been expected six months ago. The performance of the Caribbean countries depends heavily on what happens in more advanced economies that they trade with.
The report goes further with the issue: “Prospects are better in the mineral-rich countries, with Guyana and Suriname benefiting from record gold prices. In Haiti, growth is estimated to reach about six percent this year, well below the eight percent projected back in April, as earthquake reconstruction efforts have been lagging. Risks to the outlook are tilted to the downside. A further slowdown in advanced economies would dampen the recovery and add pressures to an already heavy public debt burden.                 “Meanwhile, further delays in resolving sovereign and financial sector balance sheets could lead to a generalized loss of confidence. The recent moderation in world commodity prices provides some relief to an otherwise difficult global and domestic environment. In this context, greater resolve is required in reducing public debt (which is up over nine percent of GDP since the crisis) and resisting fatigue in some countries, where pressures to increase wages and subsidies have intensified.”
The IMF advised that fiscal consolidation efforts should, to the extent possible, preserve growth and competitiveness by avoiding steep cuts in infrastructure spending.”.
The IMF report noted that “Financial sector fragilities in the region have become more troubling. In the Eastern Caribbean Currency Union (ECCU), financial sector health indicators have continued to deteriorate, highlighting the importance of steps to further strengthen the sector.”
The IMF called on authorities to diagnose the health of the financial system quickly and develop options for strengthening balance sheets, and avoid further compromising public finances. “Moreover, financial regulation and supervision frameworks require significant strengthening, including ensuring that the resolution of failed institutions is carried out transparently.
The report then came to the most serious issue facing the region—public debt. This has increased quickly during the economic crisis.
“In fact, despite reductions in real government expenditures in most countries, primary balances deteriorated almost across the board as revenue losses more than offset efforts to curb spending. In most cases, declines in real growth added to the debt burden. Fiscal consolidation efforts in the area have thus far been mixed. Countries have adopted various strategies to reduce fiscal imbalances with
a combination of revenue-enhancing measures (example VAT was introduced in a few countries and VAT rates were hiked in others) and efforts to contain spending growth, including limiting losses in public enterprises (Jamaica). However, primary spending was down by only an average of 0.3 percent of GDP between 2008 and 2010, with the bulk of the adjustment falling on capital spending, as governments sought to protect public employment and wages as well as social programs.”
St Lucia itself is expected to institute Value Added Tax in April 2012.
The report goes further:  “Some countries have combined fiscal adjustment with debt restructuring to ease their debt service burdens. Recognizing that the up-front fiscal adjustment required would be too large to meet debt service obligations and preserve debt sustainability, Antigua and Barbuda and Jamaica sought to reduce their debt service burdens. Antigua and Barbuda sought  in September 2010 to reschedule the country’s official private debt, which lowered the annual interest bill from roughly seven percent of GDP to about four percent from 2010 onward. Jamaica reached agreement with domestic private creditors to reduce its debt service burden (interest and amortization) by about 14 percent of GDP one year after the debt exchange. St Kitts and Nevis is in the process of preparing a comprehensive debt-restructuring deal involving all creditors.
“However, greater efforts are necessary to generate fiscal savings to stabilize and reduce public debt over the medium term. The IMF staff’s debt sustainability analysis suggests that the average Caribbean country will need to increase its primary balance by at least four percentage points of GDP through a combination of revenue-raising and expenditure-cutting measures . . .  Achieving meaningful fiscal savings will require tackling long-standing budget rigidities. In many countries, fiscal expenditures are mostly committed to wages, interest payments, and pensions, limiting the flexibility of fiscal adjustment. In fact, the share of nondiscretionary spending (defined as the share of expenditure on wages and salaries and interest payments) is among the highest in the Latin America and the Caribbean. A strategy to gradually reduce public wage and pension spending—not only in central government but also in autonomous agencies—will be necessary to guarantee public debt sustainability, with the added benefit of improving the region’s competitiveness. Closing loopholes and reducing tax incentives should also form part of the consolidation strategy. With weak growth in advanced economies, revenues are unlikely to return to precrisis levels without fundamental change in the tax system. Efforts should be made to review generous tax incentive schemes, the impact of which on investment
and growth remains
elusive.                         “Instead, emphasis should be on growth-enhancing structural reforms that enable private sector development. Caribbean countries can draw lessons from successful fiscal consolidation strategies in other regions. In particular, fiscal consolidations based on expenditure reductions have tended to be more effective than tax-based consolidations, and cuts in current spending are more effective than capital expenditure cuts. Moreover, these efforts work best when framed as part of a medium-term fiscal framework that extends beyond the current administration.”
Following the presentation of the Regional Economic Outlook Mr Vegara took questions from regional press. Among the questions was about governments in the Caribbean proposing stimulus packages that included the borrowing of money.
In Saint Lucia there has been much talk of how to stimulate the economy, with the main Opposition St Lucia Labour Party announcing that if they should get into office 100 million dollars will be immediately made available for stimulus. The UWP government also launched its own stimulus package earlier this year.
Said Vegara: “In countries with already high deficits and high debts it does not seem the most adequate time to launch this type of policy to support growth. The answer would be that right now the targeted policies should be more on sustainable fiscal policies.”
Vegara said that although the IMF had proposed such packages as helping to stimulate the economy by pumping money into it, in 2008, the atmosphere was not the same now and Caribbean counties needed to focus on decreasing public debt.

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