Caribbean & Central America - May 2012 (ISSN 1741-4458)

The International Monetary Fund (IMF), in its latest Regional Economic Outlook for the Western Hemisphere, warns that the Caribbean faces “vast challenges from high public debt levels and from adverse terms of trade”. 

Tourism-intensive countries are expected to grow by just 1.5% in 2012 after 0.5% growth in 2011.  The IMF reports that prospects “are somewhat more favourable” for the commodity exporters (Guyana, Suriname, and Trinidad & Tobago), but even there the picture is mixed.  The commodity-exporting group is expected to grow by 3.5% this year, but the IMF’s just-concluded Article IV Consultation with Trinidad & Tobago forecasts growth of only 1.7% in 2012 after a 1.3% contraction in 2011. 

On the region’s high levels of public debt, the IMF notes that the fiscal primary balance improved by an average of 1 percentage point in 2011 but warns, first, that public debt “persists at dauntingly high levels" and, secondly, that “the consolidation may have to be complemented with market-friendly debt restructuring".

One of the more worrying parts of the IMF’s latest report looks at competitiveness in the tourism industry for the Caribbean, and it notes that the Caribbean has lost significant market share as a result of being uncompetitive.  Correcting a trend that has lasted for two decades will, the IMF says, require action on a number of fronts, including reducing the costs of labour, energy, and trade.

The report points out that the cost of electricity in the Caribbean is some 16% higher than in the Pacific Islands and more than twice the level in the Indian Ocean tourism destinations of Mauritius and the Seychelles.  On the labour front, the cost of redundancy in the Caribbean is twice the cost of redundancy in the Pacific Islands.  And the cost of starting a business is twice the rate in the Indian Ocean islands.

The warning that some countries might have to follow the lead of St Kitts & Nevis in seeking “market-friendly debt restructuring” is reinforced by a further warning that the risks to the region’s economy are mostly on the downside – with further problems in Europe and a potential oil-price spike from tensions in the Middle East top of the risk list.  The IMF warns: “On the domestic front, fiscal fatigue could undermine market confidence, and financial sector vulnerabilities could weigh on already-high public debt levels.”

Meanwhile, in Trinidad & Tobago, the relatively strong fiscal position provides more scope for contra-cyclical policies than elsewhere.  In 2010/11, government finances were close to balance, and although the debt-to-GDP ratio has worsened from 25% in 2008 to 33% in 2011, it is still modest.  Relatively subdued inflation also provides scope for an accommodative monetary policy, with the policy rate being lowered by 75 basis points since end-2010 to 3%.  Inflation in January was 6.8%, but core inflation was only 1.8% after stripping out food-price increases.  With that background, the IMF “commended the authorities for implementing supportive policies, aided by ample buffers, which had helped maintain stability”.