Pack your bags. The vacation is over. This was the panorama of the Caribbean in 2008 and 2009, when the Great Recession emptied the islands’ beaches of tourists and dried up foreign direct investment for hotels, condos and restaurants. Current account and fiscal deficits widened in many of the Caribbean nations, and belt-tightening was the rule in households as well as governments. In some cases, the economic crisis added to government debt already accumulated from bailing out weak banks and the efforts to aid collapsing sugar and banana industries since the 1990s. According to the Caribbean Development Bank, the region’s five most indebted governments—Antigua and Barbuda, Barbados, Grenada, Jamaica, and St. Kitts and Nevis—had public debt reaching between 85 percent and 140 percent of GDP at the end of 2014. For some countries, the trickle of tourism dollars and euros coming in now is barely sufficient to finance imports or to service external debt contracted in better times.
What can be done? The IMF has published two authoritative volumes on the Caribbean’s principal fiscal and economic challenges. Both, edited by veteran analysts of the IMF’s Western Hemisphere Department, present a thoughtful comparative analysis.
Caribbean Renewal: Tackling Fiscal and Debt Challenges amounts to a fiscal policy handbook, with examples of effective debt reduction strategies used since 1970. Edited by Charles Amo-Yartey, a senior economist in the Caribbean II Division, and Therese Turner-Jones, former deputy chief of the same division, the book’s premise is based on the consensus that the region’s high debt levels must be reduced. As the editors point out, a large debt burden increases a country’s vulnerability to economic shocks, incurs high interest costs, detracts from other spending priorities such as infrastructure, and can raise refinancing risks if maturities are poorly structured.
In a key chapter, Amo-Yartey and fellow IMF economist Joel Chiedu Okwuokei highlight several ways governments can reduce their debt, including consolidating public finances (for example, cutting budgets and eliminating off-budget spending); eroding the value of local currency debt through inflation; privatizing state-owned corporations or utilities; or restructuring or defaulting on debt. Robust economic expansion, which enables countries to grow faster than their debt, is another alternative. But, as Amo-Yartey and Okwuokei emphasize, “Since growth in the current environment is virtually nonexistent, significant fiscal consolidation [in the Caribbean] is inevitable.”
All the prescriptions present formidable challenges. Many Caribbean countries have fixed or rigid foreign exchange regimes, precluding central banks from inflating away government debt without risking a currency crisis. Moreover, the authors note that while privatizing state-owned enterprises reduces debt, it can do so at the expense of losing a productive asset. Additionally, selling utilities or other state-owned companies is politically unpalatable in most Caribbean countries, where powerful unions can block privatization proposals.
And fiscal consolidation is politically risky, especially in a down economy. The size of the adjustment is one roadblock. In their chapter, IMF economists Garth Peron Nicholls and Alexandra Peter estimated that “five countries—Antigua and Barbuda, Barbados, Grenada, Jamaica, and St. Lucia—would require a fiscal [consolidation] adjustment above 5 percent of GDP relative to their primary balances in 2011” to lower respective government debt levels to 60 percent of GDP by 2020, the target set out by the Eastern Caribbean Currency Union (ECCU).
Many Caribbean governments already raise 20 to 30 percent of GDP in tax and other revenues; more may cause tax fatigue or inhibit growth. Structural reductions in current expenditures, although typically the most politically difficult for countries to implement, achieve the most successful, lasting fiscal consolidation, Okwuokei concludes in another chapter.
In their survey of 206 cases of large debt reduction from 1970 to 2009, Amo-Yartey and Okwuokei found that half of the time countries reduced their debt through a combination of fiscal consolidation, growth and higher inflation.
In the other half of cases, governments restructured their debts or defaulted, implying a high frequency of loss to creditors. This is not a surprise. Seven Caribbean countries—Antigua and Barbuda, Belize, Grenada, Jamaica, St. Kitts and Nevis, St. Vincent and the Grenadines, and Suriname—have obtained relief of government debt over the past decade. Given lingering high debt levels, some Caribbean countries still face public debt sustainability challenges. “Fiscal consolidation is necessary,” the editors conclude, “but [it] may not be sufficient to bring down debt levels, since high primary surpluses would have to be maintained over a relatively long period.”
What is a sustainable debt level? The answer varies by country, depending on factors such as economic diversification, depth of domestic capital markets, record of fiscal policy and debt management, and external and financial vulnerabilities, among others.
In Nicholls and Peter’s examination of natural debt limits and fiscal contingent liabilities, they find that by most measures, the majority of English-speaking islands have overborrowed and lack fiscal space for emergency borrowing.
In The Eastern Caribbean Economic and Currency Union: Macroeconomics and Financial Systems, edited by IMF economists Alfred Schipke, Aliona Cebotari and Nita Thacker, another group of authors tackles the historical growth and competitiveness challenges of the ECCU.
The monetary union includes many of the Caribbean’s most indebted countries. In their chapter, economist Chris Walker and IMF research assistant Sebastian Acevedo assess the suitability of the ECCU and the members’ peg to the U.S. dollar at a time of acute fiscal and economic stress for several countries. The authors find “no compelling case for a shift away from the combination of a currency union and currency board now employed by the OECS [Organization of Eastern Caribbean States]/ECCU.”
A history of shared political, economic and monetary institutions forges an important bond for the small-island ECCU members. The ECCU countries and territories have shared a common monetary authority and currency since 1965, well before gaining political independence or internal governing autonomy from the United Kingdom. The inheritance of shared institutions distinguishes the ECCU from the eurozone or African monetary unions, whose members started with separate central banks and monetary policies.
As Schipke and fellow IMF economists Koffie Nassar and Arnold McIntyre illustrate in chapter three, the economies of scale offered by shared institutions (common currency, capital and goods market, financial system supervision, and statistics) are a strong incentive for the small-island ECCU members to integrate.
And as IMF economist Sarwat Jahan demonstrates in chapter nine, despite the region’s fiscal woes, the Eastern Caribbean Central Bank has not monetized member governments’ deficits—and indeed has allowed some to default on external debt—thereby sustaining credibility of the monetary regime.The book makes clear that more needs to be done to sustain the union, however.
“Growing fiscal deficits, lack of fiscal integration, unsustainable debt, and challenges in the financial sector could threaten the currency union’s very foundation. […] The tasks for policymakers are significant and the rapidly changing global environment has increased the need for action,” Schipke, Cebotari and Thacker reflect.
The books together fill a knowledge gap on the Caribbean debt crisis with helpful policy lessons for financial analysts, economists, investors, resident taxpayers, and policymakers alike.