Many Caribbean countries' debt burden still too high
Al EdwardsFriday, March 03, 2006
While the Caribbean Single Market and Economy (CSME) takes centre stage across the region, many member countries are encumbered by high debt which impedes economic progress. The year 2005 culminated in only Trinidad and Tobago and Jamaica enjoying a higher credit rating than they did back in 1999.
"And that speaks volumes to the problems of economic performance and high levels of economic risk taken by a number of these countries," said Jwala Rambarran, Chief Economist at Caribbean Money Market Brokers (CMMB). Ramabarran's comments came at a review of St Vincent and the Grenadines' fiscal budget in that country's capital city, Kingstown.
"We in the Caribbean are becoming higher-risk economies and this shows up tremendously when we look at the Caribbean's public debt profile. At the moment we have seven Caribbean countries that rank among the highest indebted emerging markets in the world.
"The Caribbean is perceived now as being very risky by the international investor community. If you want these guys to invest here it helps to meet some of your financial obligations," Rmabarran added.
Caribbean economies have for the better part of 30 years been characterised by high debt. In the region there are two systems of measuring public debt. The IMF presents data on the total debt of a country, that is central government debt, as well as other public sector debt such as debt incurred by statutory agencies.
The Eastern Caribbean Central Bank prefers to measure only central government debt. Debt figures published by the Central Bank tend to be lower than that of the IMF. Debt figures include both guarantees or contingent liabilities as well as actual borrowed money.
Debt is expressed as a ratio of a country's Gross Domestic Product (GDP). In measuring debt to GDP ratios, a comparison is made between total debt against the GDP of a country. The GDP is the total value of goods produced and services provided in a country in one year. For the year 2004, St. Lucia's GDP stood at EC$2.07 billion.
Assistant Director in the Western Hemisphere Department of the IMF, Ratna Sahay surmised in a paper entitled, "Stabilization, debt and fiscal policy in the Caribbean": 'While Caribbean countries have been largely successful in bringing inflation down to single-digit levels in recent years - regardless of their exchange rate regime - growth has been disappointing and public debt has risen rapidly.
By 2003, 14 of 15 Caribbean countries were ranked in the top 30 of the world's highly indebted emerging market countries.' She added that most of the increase in public debt is accounted for by a deterioration in primary fiscal balances largely due to a sharp increase in expenditures, rather than a fall in revenues.
"With the countries of the region now increasingly facing unsustainable debt positions, innovative ways need to be found to raise economic growth rates and generate fiscal savings in order to reverse the debt build-up," said Sahay.The European Central Bank (ECB) believes that the Caribbean should adhere to a more rule-based framework for the adoption of fiscal policy decisions as opposed to a discretionary fiscal policy outlook.
Having set rules means establishing at the very least a medium-term target for the government to balance the budget as opposed to an ad hoc approach which sees the decision on the budgetary target made without having to adhere to explicit criteria when determining the size of the budget balance in a particular year or over the medium-term.
"Across the Eastern Caribbean, countries have already realised that they face tremendous fiscal and debt challenges and they have started with considerable delay, to try and address the situation," said Rambarran."
The CMMB chief economist noted that Dominica has been under an International Monetary Fund (IMF) programme for the past four years, while Grenada was "riding out pretty good recovery' after the devastating Hurricane Ivan of September 2004.
Rambarran was of the view that Grenada may also need to join Dominica under an IMF programme.
The ECB is recommending annual fiscal balances to be in surplus or in balance, a limitation of the domestic and foreign debt ratio to 70 per cent of GDP and a reduction of the inflation rate to 3 per cent.
The Monetary Council of the Eastern Caribbean Central Bank has adopted benchmarks limiting budget deficits to 3 per cent of GDP, outstanding public sector debt to no more than 60 per cent of GDP and debt service revenues to no more than 15 per cent of current revenue.
Rambarran pointed out that only three countries across the region had met the European Union criterion of keeping public debt at 70 per cent of Gross Domestic Product (GDP). According to Sahay of the IMF, GDP growth in the Caribbean region relative to other developing countries during 1980-2003 was low.
The average Caribbean small-state GDP grew at 2.5 per cent per annum in that period. Compared to other developing countries, this growth rate was only marginally higher than that of Latin America.
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