Spring in Washington D.C. is marked by two events: the blooming of thousands of cherry blossom trees, planted around the National Mall and the Tidal Basin, and the arrival of attendees, including finance ministers and central bank governors, at the IMF and World Bank Headquarters for the Spring Meetings.
Just as the delicate and beautiful cherry blossoms in D.C. need the perfect mix of gentle spring warmth and a touch of chill to bloom, so too finance ministers and central bank governors need to apply the right mix of fiscal, monetary, and structural measures to boost growth in their countries.
The good news is that after six years of disappointing growth, the world economy seems to be finally gaining momentum which holds out the promise of more jobs, higher incomes, and a better standard of living. But even as global growth might be recovering, we cannot be sure that we are out of the woods, just yet.
Too much frost at the wrong time can kill off the buds as what happened this year to 70% of the cherry blossom buds. Similarly, political and policy uncertainty related to Brexit negotiations, President Trump’s protectionist inclinations, and rising populist and nationalist tendencies in many Western democracies could badly hurt global growth prospects.
So it is, the delicate balance that is the world economy, like the cherry blossoms and the frost.
How then can countries strengthen the global financial architecture to safeguard and nurture the global recovery? How can countries work together to find solutions to global challenges such as refugee and humanitarian crises, natural disasters, and climate change, the very climate change that affected the cherry blooms this year in D.C.?
Such discussions at the IMF/World Bank meetings are particularly relevant for a group of mostly middle-income small states in the Caribbean region caught in a vicious low growth-high debt trap since 2000, experiencing stagnant growth and unsustainable levels of public debt.
Countries in the Caribbean have been growing at roughly 2% per year for the past two decades, while small island states, in other parts of the world, have been growing, on average, at a much faster annual rate of 3.5%. Think about that for a moment. The economies of the Caribbean are significantly lagging behind all other similar economies in growth performance.
The slowdown in the Caribbean started in the 1990s, triggered by the loss of trade preferences to European markets, reduced fiscal space, and recurring natural disasters, usually hurricanes and floods. Slower economic growth also reflects deep-rooted competitiveness problems. Most Caribbean small states rank poorly on the World Economic Forum’s Global Competitiveness Index.
In its latest World Economic Outlook report, the IMF expects the Caribbean to maintain its sluggish growth performance in 2017 and beyond. This does not bode well for the region’s ability to cope with its high debt burden.
While it’s widely accepted that most developing countries need to borrow to finance their economic development, there’s a threshold beyond which high debt for an extended period of time forces governments to cut social spending and public sector investment, exposes the financial system to the threat of debt default, and acts as a drag on economic growth.
In general, public debt/GDP ratios over 50-60% are considered high and close to the debt tipping point.
By that measure, at the end of 2016, only two Caribbean countries have low debt – Guyana and Haiti. And this is only because these two countries are considered poor enough and highly indebted enough to benefit from international debt relief initiatives offered by the IMF and the World Bank.
Another eight Caribbean small states – Trinidad and Tobago, the Bahamas, Belize, Dominica, St. Kitts & Nevis, St. Lucia, and St. Vincent & the Grenadines – have debt in the distress range, between 60 to 90% of GDP.
Incidentally, the announcement that Standard and Poor’s had downgraded Trinidad & Tobago’s sovereign credit rating took place during the IMF/World Bank Spring meetings, a most embarrassing situation for the country and a damming indictment of the authorities’ economic management capability.
Citing high and rising public debt, which has reached 61% of GDP, S&P warned that Trinidad and Tobago will face further downgrades unless there’s some stabilization of the debt burden. This rating action will make it more difficult and expensive for an already struggling government without any coherent economic plan to borrow on the international capital markets in order to finance its large fiscal deficit.
The remaining four countries – Antigua & Barbuda, Barbados, Grenada and Jamaica – have unsustainable debt, beyond 90% of GDP.
By these estimates, nearly all Caribbean countries by the late 2010s had already crossed the critical debt overhang threshold with severe consequences for their economic growth and development prospects.
In fact, among the member countries of the Commonwealth classified as small states, the issue of unsustainable debt is becoming largely a Caribbean problem.
Over the past two decades, public debt has fallen by more than half in low-income countries classified as small states in Sub-Saharan Africa, and by one-third in Pacific small states. Since the mid-1990s, however, public debt has doubled in the Caribbean, despite numerous debt rescheduling episodes by several countries to avoid defaults.
Several factors explain why the Caribbean has accumulated debt so rapidly. The first is the high cost of frequent natural disasters, in whose wake Caribbean governments immediately increase public spending to support recovery and reconstruction efforts, often funding these large and unplanned expenditures by expensive external borrowing.
The late Sir Dwight Veneer, former Governor of the Eastern Caribbean Central Bank captured this link between natural disasters and debt quite vividly when he said, “Also every year we have a hurricane season, which can destroy the country’s GDP. In some countries, it can also lead to high debt levels. Their infrastructure is destroyed before they paid for it, so they borrow again. Then it is destroyed a second, and sometimes even a third time”.
Fiscal slippage is a second factor which has contributed to indebtedness in some countries. The degree of fiscal adjustment required for many Caribbean small states to reduce public debt to a more sustainable level is neither economically feasible nor politically desirable, especially when servicing that debt consumes more and more resources.
The extent of this problem is captured starkly by Bruce Golding, the former Prime Minister of Jamaica, who indicated: “Every year for many years, we have been spending more than we earn. Every year, we have to borrow to make up the difference, so, each year, the debt gets bigger and bigger and each year we have to set aside more money to pay the interest on that debt… For the last 10 years, all of the taxes we collect have had to be used to service that debt. So, before we can pay one teacher or nurse or policeman, before we can patch one pothole, before we can put one bottle of medicine in our hospitals or provide one school lunch for a needy child, we have to borrow more money, piling up the debt even further and the cost of servicing that debt even higher.”
A third factor relates to the Caribbean’s high vulnerability to external shocks, for which many governments are not well prepared. With dwindling aid flows from Western donor countries like the United States, Canada and the United Kingdom, for example, many Caribbean small states have turned to more expensive commercial borrowing as a source of external financing.
Finally, throughout the Caribbean, there are many instances where governments assumed responsibility for the losses of public enterprises and private financial entities, the most striking being Jamaica’s bailout of its financial sector in the mid-1990s and Trinidad and Tobago’s bailout of CLICO, the country’s largest insurance company, in 2009.
Faced with a weaker global growth environment, projections for Caribbean debt sustainability are grim. By 2020, nearly three-quarters of all small states with unsustainable debt levels will be Caribbean countries.
Even more sobering is that by 2030, when the United Nations 2030 Agenda for Sustainable Development has come to an end, the majority of the Caribbean region’s small states are likely to face the same debt predicament, as they do now and as they did fifteen years ago.
There is a very real prospect that, in dealing with unsustainable debt, Caribbean small states will have lost the first three decades of the twenty first century, and foregone opportunities for building more inclusive and resilient regional economies.
There’s therefore a compelling special case for the international community to help resolve the silent debt crisis in Caribbean small states. In fact, Sustainable Development Goal (SDG) 17 commits governments to “assist developing countries in attaining long-term debt sustainability through coordinated policies aimed at fostering debt financing, debt relief and debt restructuring, as appropriate…”.
However, there is a wide disconnect between this promise and reality. No international consensus exists on a global framework to undertake an orderly, predictable and equitable restructuring of sovereign debt.
Despite enormous complexity, I believe SDG 17 is an achievable goal for Caribbean small states. But it requires a new strategic approach.
Under my leadership as the former Governor of the Central Bank of Trinidad and Tobago, the Central Bank initiated and convened two Caribbean Region Dialogue (CRD) meetings in 2015 to find innovative sources of financing to help contain the region’s onerous public debt overhang and strengthen economic growth.
These CRD meetings were done jointly with one of the most influential economic groups in the world, the G20 Development Working Group, under Turkey’s Presidency, and held on the margins of the IMF/World Bank meetings making it easier to bring key development partners together.
Discussions focused on the strong potential of innovative financing methods such as Diaspora Bonds, the Blue Economy and the BRICS New Development Bank (NDB) to help Caribbean small states meet the SDGs.
The sharing of knowledge and international best practices at these CRD meetings were partly responsible for some promising outcomes such as Jamaica contemplating the issue of a Diaspora Bond, Grenada examining a debt for climate swap, and the President Kamath of the NDB welcoming the opportunity to advance collaboration between the Caribbean and the NDB.
Regrettably, the person who illegally replaced me foolishly scrapped this pioneering Caribbean-G20 work, preferring instead to sit on the sidelines at the IMF/World Bank meetings as a silent, passive observer rather than as an active influencer of the Caribbean’s future financial architecture.
It’s evident, however, that work on resolving the Caribbean’s debt and financing challenges desperately needs to continue. One immediate way is for Caribbean finance ministers and central bank governors to jointly convene a consultative regional conference on achieving Caribbean public debt sustainability.
Jamaica should take the lead on championing this initiative. The Jamaican authorities have now replaced those in Trinidad and Tobago as the respected regional leader in the Caribbean, attracting international attention for their tremendous progress in stabilizing the Jamaican economy, reducing the country’s debt overhang, and galvanizing support for tackling the Caribbean debt challenge.
Such a consultative regional conference could bring together policymakers from Caribbean small states as well as regional, bilateral and multilateral development partners and international debt experts.
The aim would be to identify the most practical and useful menu of options for Caribbean small states to achieve debt sustainability by 2030, exploring the feasibility of debt for climate swaps, diaspora financing, and a new debt strategy for heavily indebted, middle-income countries.
It’s time for Caribbean policymakers to move from diagnosis to action before the debt frost takes hold and strangles our economies.
Otherwise the prescient words of the former President of Guyana, Bharrat Jagdeo, may come to haunt the region:
‘The [Caribbean] region is heading towards bankruptcy if countries could be declared bankrupt. When you have two items, just paying wages and salaries and debt and that’s more than your revenue, what remains to run the country? Many governments in the Region are approaching that kind of position.”