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IMF: Caribbean finally recovering


rhondathompson, [email protected]

IMF: Caribbean finally recovering

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BOGATA, Colombia – The International Monetary Fund (IMF) says that the Caribbean is finally turning the corner amid “vast challenges”.
In its new Regional Economic Outlook, released here, the Washington-based financial institution said the Caribbean is gradually recovering from last year’s severe recession.
It said tourism appears to have turned the corner, but noted that “headwinds from weak labour markets in advanced economies” constrain its growth prospects.
“The key challenge lies in consolidating public finances while strengthening competitiveness,” said the IMF, stating, however, that prospects are “somewhat more favourable in countries with lower debt burdens and lower dependence on tourism”.
After declining by more than three per cent in 2009, the IMF said real Gross Domestic Product (GDP) for the Caribbean as a whole is projected to post only marginal gains in 2010, growing by an average of about one per cent, after relatively low debt ratios and benefiting from ongoing reconstruction efforts in Haiti.
In Haiti, the reconstruction that followed the devastating January 12 earthquake is supporting a fragile recovery, it said.
The Regional Economic Outlook said large external assistance in the years ahead in Haiti is expected to boost growth, while the impact on inflation is expected to be contained, “given very large output gaps and the high import component of aid”.
“The prospects would be much different, however, if the pledged assistance failed to materialize on time,” The IMF warned, noting that the tourism sector in the Caribbean is expanding very slowly, “in line with the tepid recovery in employment conditions in advanced economies”.
During the first half of 2010, the IMF said tourist arrivals in the Caribbean increased by an average of 3.5 per cent compared with the same period last year, adding that this was led by increased arrivals from the United States and Canada, against continued declines from Europe.
“The recovery of tourism, however, has been uneven,” it said, stating that smaller islands in the region have experienced a “sharper and more prolonged decline in tourist arrivals than some of the larger islands.
“A closer look at the data suggests that destinations that significantly reduced hotel prices following the crisis experienced milder declines in arrivals,” the IMF said.
“Though many factors are likely at play, downward price rigidities could help explain these intraregional differences,” it added, stating, for example, that hotels in the Dominican Republic and Jamaica lowered prices more than other countries and did not experience a decline in the number of tourist arrivals.
In contrast, the IMF said hotels in The Bahamas and Barbados were more reluctant to reduce prices, resulting in the falling of tourist arrivals.
“Boosting competitiveness and growth over the medium term remains a key policy challenge,” it said, adding that, for the whole region, improving productivity will require “sustained structural reforms,” including enhancing the role of the tourism sector.
The IMF said labour markets would need to be more flexible and especially important, given fixed exchange rate systems, to allow the region to better react to external shocks and to increased competition for tourists from inside and outside the region, including Cuba.
It said risks to the region are on the downside, stating that in addition to the risks of policy slippages, the region is highly exposed to advanced country labour conditions, “which could falter.
“With no space to adopt countercyclical policies, the region would have to adjust to a more negative scenario by focusing any expenditure on protecting the poorest households,” it warned.
The IMF noted that, in most countries in the region, efforts are under way to consolidate public finances and reduce heavy public debt burdens, but it cautioned that weak growth and low revenues “make progress difficult”.
Despite a contraction in real primary spending, the IMF said the Caribbean’s public debt is projected to increase by an average of 15 percentage points of GDP between 2008 and 2010.
To finance their large fiscal imbalances, it said regional governments have, therefore, turned to local pension funds and banks, as well as international financial institutions, to finance the large fiscal imbalances.
The IMF said concessional financing from Venezuela’s PetroCaribe oil agreement has also played “an important role” but it said that doubts persist over the sustainability of this assistance, “given economic conditions in Venezuela”. (CMC)

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