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ON THE RIGHT: Caribbean debt is too high

Inter-American Development Bank

ON THE RIGHT: Caribbean debt is too high

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Should the Caribbean be worried about its mounting debt?

A mantra often invoked to describe the Caribbean is: “high debt, low growth.” It was never completely true. Today it may have become so.

The tourism countries, Jamaica, Barbados, and The Bahamas, are still in distress from the tailwinds from the world crisis of 2009. The commodity-exporting countries, Guyana, Suriname, and Trinidad and Tobago, relatively unscathed by that crisis, face strong headwinds as the international commodity boom wanes.

Excessive debt brings several problems. When the debt level is too high, downward pressure on economic growth occurs, and, combined with a low credit rating, this implies high interest rates hence interest payments that squeeze out governments’ investment and social expenditure. A steep rise in public debt could place a country into a vicious unsustainable cycle of increasing debt and rising interest payments.

In all but two countries, debt to GDP in 2015 is higher than it was in 2012. Whether fiscal policy is adequate requires a benchmark to determine whether debt is, or is forecast to become, too high. One possible debt benchmark is derived from the estimated relation between debt and economic growth. Three tourism-dependent countries and the Organisation of Eastern Caribbean States are in the negative region of the debt-growth relation. However, the commodity exporters are still below the 60 per cent threshold. This is likely to change.

Expectations of a rise in public debt in commodity countries stems from the sharp fall in commodity related fiscal revenues that is forecast to persist. Commodity-related revenues averaged 16 per cent, 36 per cent, and 50 per cent of total revenues for Guyana, Suriname, and Trinidad and Tobago, respectively, during the period 2011-14. This helped to boost their expenditures on infrastructure, education, and other social programmes. These revenues have dived and are expected to remain depressed over the short term. The forecast rise in debt reflects that there will be insufficient fiscal retrenchment to compensate for the revenue loss. Significant fiscal effort is required to stabilise the debt.

Barbados, The Bahamas, and Jamaica are on the “dark” side of the debt-growth relation, that is, with debt levels that put negative pressure on economic growth. Guyana and Trinidad and Tobago are expected to join them.

Only Jamaica and to a lesser extent Barbados are expected to reduce their debt levels in the next two years, although remaining on the dark side of the growth-debt relation.

Suriname, with the steepest recent rise in debt, is expected, under the auspices of an IMF programme, to stabilise its debt ratio below the dark side value.

Thus, for many countries fiscal adjustment, that is, a greater primary fiscal surplus, is required to stabilise and reverse the rise in the debt to GDP ratio and to follow the debt reducing path adopted by Jamaica.

Where the economic growth is higher, the required fiscal adjustment would be less.

Increasing economic growth thus has to be an integral part of the strategy to reduce debt.

Worldwide downside risks have increased. The recent World Economic Outlook not only reduced world growth forecasts to 3.2 per cent and 3.5 per cent in 2016 and 2017, respectively, but also emphasised pronounced increased downside risks combined with reduced policy space to respond to negative shocks.

In the Caribbean, the present levels of fiscal buffers are inadequate and are forecast, other than for Jamaica, to worsen, thus reducing policy space to respond to any external shocks.