Caribbean & Central America - July 2017 (ISSN 1741-4458)

The International Monetary Fund (IMF) has been looking at the performance of the Eastern Caribbean Currency Union (ECCU) and the need for continuing fiscal discipline. It makes a case for adopting fiscal rules such as are already in place in Jamaica and Grenada. The members of the ECCU are Antigua & Barbuda, Dominica, Grenada, St Kitts & Nevis, St Lucia, and St Vincent & the Grenadines.

The first point that the IMF makes is that growth in the ECCU has lagged behind other emerging markets and developing economies (EMDE) over the past four decades. Since 1980, EMDEs have grown by an average of 4.5% per annum; the ECCU economies have grown by an average of 3.3%. The main divergence has come since the beginning of the 2000s and most particularly since the global financial crisis (GFC) in 2008/09.

The second point is how heterogeneous this small group of nations is when it comes to economic development. For instance, between 1980 and 2014, St Kitts & Nevis had an average growth rate of 4%; Antigua, Grenada, St Lucia, and St Vincent averaged between 3.3% and 3.5%; and Dominica averaged below 3%. The heterogeneity is even more stark when one looks at GDP per capita, which is twice as high in St Kitts & Nevis and nearly twice as high in Antigua & Barbuda as in the other ECCU economies.

There are equally significant divergences across the ECCU economies on employment. The employment-to-population ratio is 50% in St Kitts & Nevis, but only 30% in St Lucia and St Vincent & the Grenadines.

Looking forward, without significant improvements in productivity, the IMF is projecting dismal growth of between 1.5% and 2.5% for the ECCU economies.

Public debt remains a major concern, and the IMF notes that “while the ECCU debt target [of 60% of GDP by 2030] provides a long-run anchor for member governments’ fiscal policies, it does not offer a policy coordination mechanism to meet the target”. The IMF also warns that “the target is not binding and ownership by national governments seems low”. The target date for reducing debt to 60% of GDP has already slipped (in 2015) from 2020 to 2030, and the overall deficit target of 3% of GDP was abandoned in 2006 “for lack of compliance”.

The IMF believes that the adoption of fiscal rules by the ECCU countries could be helpful. In the region, Jamaica and Grenada already operate within such a framework.

A key component, the IMF argues, should be the adoption by each country of a primary balance floor, and although this might lead to the compression of primary expenditure during an economic downturn (which may exacerbate it), the advantages of a primary balance rule “are that it is fully under the government’s control, is simple to understand by the government and public, leads to a lasting reduction in public debt, and is verifiable”.

The IMF says that any such rule must exclude most exceptional non-tax revenue, such as that from citizenship-by-investment programmes. On the other hand, it should include escape clauses to enable deviations during times of crisis, such as after natural disasters or during deep recessions. However, warns the IMF, “the duration of the deviation from the rule needs to be specified in advance and be relatively short, such as one or two years”.