Caribbean & Central America - November 2021

In our October issue [EB-21-10] we reported in brief on the call by United Nations (UN) Secretary General António Guterres to address the developing crisis of debt distress, which he described at the 15^th session of the UN Conference for Trade and Development (Unctad) as the “dagger through the heart of global recovery”. In any discussion of over-indebtedness, the Caribbean nations feature heavily, and back in March 2021 the UN was forthright in its warning that “the severe fiscal impacts of the [Covid-19] crisis are triggering debt distress in a growing number of countries”. Such warnings and calls for action have continued, but so far with little concrete result.

At the Unctad conference in Bridgetown, Barbados, in early October, the secretary-general of the Caribbean Community (Caricom), Carla Bennett, used her presentation to highlight, in particular, the “issues and concerns” of Small Island and Low-lying Coastal Developing States (SIDS). According to Bennett, SIDS in 2020 suffered GDP contractions that were on average three times worse than the global average. As a result of the Covid-19 pandemic, she argued: “We applied funds that were budgeted for other purposes to meet the needs of the health sector for PPEs, medical equipment, testing supplies, and vaccines. We shifted funds to meet basic social safety nets. We repurposed loans and borrowed additional funds. Already high debt burdens grew even higher.”

She added: “New debt arising from the need to address the Covid-19 crisis, together with existing debt stock, will continue to appropriate a significant proportion of public resources in debt repayments while strangling critical infrastructural public investments required for economic rehabilitation…With the reality of our vulnerabilities exposed by the Covid and climate crises, the call for a more appropriate basis for determining access to concessional financing takes on greater urgency.”

The Caricom secretary-general highlighted in particular that defining lending criteria on the basis of GDP per capita was unfair. Her proposal was to continue with the development and acceptance of the Multi-Dimensional Vulnerability Index (MVI). She said that until new options are developed, “multilateral support is on the basis of the same traditional policy menu and funding instruments that have been used to handle economic imbalances in the past. That policy menu does not adequately address our inherent vulnerabilities.”

At the same time as the Unctad conference, the World Bank issued a report on Recovering Growth, Rebuilding Dynamic Post COVID Economies Amid Fiscal Constraints. On the release of the report, the World Bank’s chief economist for Latin America and the Caribbean (LAC), William Maloney, pointed out that average public debt in the region had risen by 15 points to 75.38% of GDP during a year and a half of the crisis. He warned: “This is one area we need to be very closely following just because the amounts [have] suddenly jump[ed] so much and in the context of international interest rates, potentially it could become a problem.”

Maloney pointed out that for many countries in the Caribbean, the Covid crisis had become so problematic because of the extreme reliance of some of the economies on tourism. Yet, he warned, for many of these small island states diversifying away from their one comparative advantage would be problematic. He said: “So, yes, diversifying is important, but we have to be honest about what’s possible.”

On 21 October, it was the turn of the International Monetary Fund (IMF) to step into the ring, this time with its latest Regional Economic Outlook for Latin America and the Caribbean. It was not very encouraging. It noted that for the tourism-dependent countries of the Caribbean economic growth for this year would be just 2.3% after the Caribbean’s contraction of -9% in 2020. Among the downside risks it noted, along with the possibility of more deadly and transmissible Covid variants, were those related to the region’s burgeoning debt. It warned about a potential “tightening of global financial conditions, sovereign debt rollover risks, and social unrest…”

The Bridgetown Covenant issued at the end of the Unctad conference in early October included an acknowledgement of the G20’s Debt Service Suspension Initiative (DSSI). But the limitations of this initiative were highlighted by the UN in its March 2021 report Liquidity and debt solutions to invest in the SDGs: the time to act is now. The report noted that the financial impact of the DSSI “has been blunted by the lack of participation of private creditors, to whom DSSI eligible countries collectively owe about one third of their total debt service obligations in 2021”.

Another gap in the DSSI scheme, the UN noted, was that “eligibility criteria exclude nine of the 34 countries with a substantial risk of debt default”. In addition, and of particular significance for the Caribbean, “middle-income countries not eligible to the DSSI have US$31bn in bilateral debt service due in 2021 compared to US$16.6bn for eligible countries”.

According to the communique at the end of the 30-31 October G20 summit in Rome, the DSSI will have deferred at least US$12.7bn of total debt service between May 2020 and December 2021, benefitting 50 countries. Of these 50, however, only four are in the Commonwealth Caribbean: Dominica, St Lucia, Grenada, and St Vincent & the Grenadines.

The Bridgetown Covenant called for “further efforts…to examine ways to improve the architecture for sovereign debt restructuring involving private sector creditors…” But this continues to be an illusive goal. All the G20 communique could say was that “we stress the importance for private creditors and other bilateral creditors to provide debt treatments on terms at least as favourable [as the DSSI]…”