Caribbean economies are stuck in a vicious cycle of high debt and low growth, and unless a number of measures are put in place there is very little hope this situation would change any time soon, an International Monetary Fund (IMF) official has warned.
Addressing the 33rd Adlith Brown Memorial Lecture at the Grande Salle on Tuesday night, Dr Arnold McIntyre, Deputy Division Chief in the Caribbean Division 1 of the IMF’s Western Hemisphere Department, said Barbados and the rest of the region continued to perform poorly when compared to other small states and emerging economies.
“We are losing the development gains that we achieved over 30 years. Since 2000 real GDP [gross domestic product] growth of Caribbean economies has been about half of that of emerging markets and two-thirds that of non-Caribbean small states,” he said.
He said while there was no single factor responsible for the weak growth and high debt facing Caribbean economies, a number of issues including low productivity and slow adaptation of technology, high government spending and natural disasters were some of the contributing elements.
In addition, said McIntyre, “overall persistent macro-economic imbalances – particularly high fiscal deficits, and structural impediments to growth, are the root cause of our malaise”.
“I chose to capture it by saying the Caribbean has been stuck in a vicious cycle of high debt and low growth. Structural factors, deeply embedded in the region’s economies are leading to weak growth and high debt is reinforcing the vicious cycle. High debt dampens growth, weak growth drives up debt,” he explained.
He further explained that a rapid increase in debt was often driven by large deficits in bad times but not offset by savings in good times.
“We have a strong bias towards deficits,” he added, pointing out that countries prone to natural disasters tend to ramp up spending to mitigate those effects, and this was a recipe for high deficits and high debt.
He said given the low fiscal space and little resilience against external shocks, Barbados and other Caribbean economies “need buffers so that we don’t respond to shocks by elevating debt”.
He also pointed out that non-performing loans, inefficient state entities and key structural impediments to doing business, brain drain and elevated crime levels, were all impediments to economic growth within the region.
McIntyre said a part of the overall solution for the region was the need for fiscal reconstruction and reform of state enterprises, improved policies to tackle social issues, adaptation of technology, transparent fiscal reporting, the implementation of public financial management systems and a diversification of the energy stock.
Insisting that he did not have all the answers, the economist said the solution should also include governments reassessing their financial position and exercising fiscal discipline.
“The macro-economic impediments, a weak fiscal position and elevated levels of public debt are reinforcing the negative growth effects of the structural impediments and the structural impediments are producing weak growth that is negatively impacting macro-economic performance. And it has been going on for a long time. What the crisis did was perhaps bring it on faster,” he said.
Acknowledging that no solution would be easy or quick, the economist said the situation would require persistence and a strengthening of policies.
“It is not a matter of making a one-step adjustment to reach fiscal sustainability. We have to be able to sustain fiscal discipline,” he warned.
McIntyre said in addition to the establishment of “supporting fiscal institutions” and oversight committees, decisions taken should be inclusive of the society and there should also be regular communication with the population.
“We have to move from a vicious cycle of low growth and high debt to a virtuous cycle of high growth and low debt,” he said.
“None of these reforms is going to generate growth overnight . . . Stop and go is very debilitating because then you will have no credibility. . . I am not saying it will be an easy process. There are mistakes countries make, you learn from them but it is the dialogue that is needed. Policymakers must embrace their countries in the dialogue,” he said.