In recent years, the small states of the Caribbean have experienced low rates of economic growth, with the last rapid growth spurt in the 1980s that was fuelled mainly by expansion of tourism, banana exports and public investments.
The slowdown that started in the 1990s was triggered by the loss of trade preferences for sugar and bananas, higher oil prices and deterioration of the terms of trade, causing reduced fiscal space. The effective buffer has been remittances which have grown steadily despite the economic downturn in the US.
The limitations of these small economies have been compounded by adverse external economic developments. First, the frequency of natural disasters has taken its toll. Over the last 60 years, the Caribbean countries have suffered from 187 natural disasters and as a result have experienced losses equivalent to almost one per cent of GDP on average in damage each year. Second, there has been a global economic crisis since late 2008 that has restrained tourism and private foreign investment.
Part of the problem has been misguided government policies, most notably that of debt-financed economic growth which can only be sustained temporarily and within prudent limits before becoming a major constraint to economic growth — as is evident in fiscal deficits and in the balance of payments. The deficit in the external current accounts has increased, especially in tourism-driven countries from a peak of 7 per cent of GDP in 1993 to 18 per cent in 2010.
The International Monetary Fund (IMF), in a paper released in February, estimates that “the public sector accounts for about a third of the external imbalance in the Caribbean, and is the largest contributor to the deficit in a few countries”.
Borrowing to finance expansionary government expenditure has made the countries of the region among the most indebted in the world. The debt is now a larger drag on economic growth than the unfavourable external economic circumstances. Several countries now have debt/GDP ratios approaching or exceeding 100 per cent. A country with a debt/GDP ratio of over 90 per cent cannot grow out of debt; in other words, the debt is unsustainable.
A clear indicator that debt has reached unsustainable levels in many countries is the number of debt-restructuring exercises. St Kitts and Jamaica (twice) restructured part of their debt in an amicable and orderly way. Belize defaulted on its external debt and Grenada defaulted on its debt to Taiwan. Guyana has had its debt cancelled more than once because it is a least developed country that qualified for highly-indebted-poor-country treatment.
The imperatives for action must include fiscal consolidation and improved debt management by regional governments; debt restructuring to allow the growth process to restart, and an injection of concessionary financing from the IMF and the World Bank.
The IMF should be assisting debtor countries with financing and letting its imprimatur assist the debtor countries to restructure their debt. Indeed Jamaica had to restructure its debt as part of the prior action to get financing from the IMF.
The terms were so onerous for Belize that it went ahead without the IMF. Meanwhile the World Bank feigns concern but under-funds the region, leaving this to the much smaller Inter-American Development Bank.