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ON THE LEFT: Dependence on fossil fuel too heavy


INTERNATIONAL MONETARY FUND

ON THE LEFT: Dependence on fossil fuel too heavy

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CARIBBEAN ECONOMIES are characterised by their over-dependence on imported fossil fuels. Except for Trinidad and Tobago, which is the single net exporter of oil and natural gas in the Caribbean, all other Caribbean countries are net importers of oil.

Suriname is the most energy independent owing to its crude oil production and significant wealth of hydropower. Of the remaining countries, about 87 per cent of primary energy consumed is imported petroleum products, mostly diesel fuel for electricity generation, gasoline for transportation, and liquefied petroleum gas.

Hydroelectric power, harnessed through facilities in Belize, Dominica, St Vincent and the Grenadines, and Suriname, supplies two-and-a-half per cent of energy consumption in region.

Over the past decade, persistently high oil prices have increased macroeconomic pressures in oil importing Caribbean countries. The average value of net oil imports has doubled, widening the trade and external current account deficit by an average of 3.7 per cent of gross domestic product (GDP) over 2005 to 2014, compared with the previous decade. Terms of trade worsened and pressure on foreign exchange reserves increased.

The energy bill has been absorbing a growing share of households’ discretionary real income, reducing consumption spending in other sectors of the economy.

High and volatile electricity prices have raised the cost of doing business in the region.

Fixed exchange rate regimes in many Caribbean countries limit the extent to which the exchange rate can cushion the impact of oil price shocks on external balances. Large and persistent inflationary shocks, as the ones resulting from high fuel prices, expose these countries to episodes of real exchange rate appreciation, triggering a difficult-to-reverse loss of competitiveness in the region.

Moreover, the tourism industry is exposed to spillovers of international oil price shocks through potentially lower tourism receipts as high oil prices dampen demand from key source markets and could increase the cost of airfare, encouraging a substitution effect to other tourist destinations.

More broadly, external shocks have been an important source of business cycle fluctuations in the Caribbean. More recently, oil prices have come down, which is an expansionary shock for most countries in the region.

A one percentage point increase in advanced economies’ real GDP growth increases real GDP growth by one percentage point, on average, in tourism dependent economies, and 0.5 percentage point in commodity producers.

After five years, the average cumulative increase in real GDP growth comes to 2.4 percentage points and 1.2 percentage points, respectively.

A ten percentage point decrease in real oil prices increases real GDP growth in the first year by 0.2 percentage point in tourism dependent economies and 0.05 percentage point for the rest of the sample. Suriname and Trinidad and Tobago are oil exporters and lower oil prices reduce their real GDP growth. After five years, the average cumulative increase in real GDP growth in tourism dependent economies is 0.5 percentage point and 0.1 percentage point for the rest of the Caribbean countries, showcasing the high sensitivity of tourism dependent economies to oil price shocks.

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