Economic challenges in 2009

by Nilio Gumbs 06.MAR.09

The effects of the global financial meltdown have reached the shores of the Caribbean much earlier than may have been anticipated – the CL Financial Group and Stanford International Bank debacle- a precursor to further grim news that may await us throughout the year, with social, economic and political implications.{{more}}

Barring the greed of investors and bankers, 2009 will pose several challenges to this country and the wider Caribbean due to the recession in major economies of Europe and North America.

The major pillars of our economy, tourism and remittances, are inextricably linked to the USA, UK and Canada and can be adversely affected by the economic downturn in those countries.

Tourism revenue is the largest contributor to the local economy. Tourism arrivals and revenues amount to 89,637 and EC $300.1 million, respectively, in 2007. Tourism revenue itself constitutes 36.6% of Gross Domestic Product in that same year.

But as the unemployment rate rises to 1.97 million or 6.3 % of the labour force in Britain and 7.6 percent in the USA, it is likely that most Americans and Brits will tighten their economic belt and cut back on consumption, including leisure, possibly affecting attendance to our Carnival celebrations also.

Any fall in tourist arrivals may have implications for government revenue and the ability to undertake developmental projects.

Remittances are another driver of the local economy and can be another casualty of the global economic downturn. Remittances do provide an economic lifeline to numerous Vincentian households. They top up numerous households’ disposable incomes and go a long way towards alleviating poverty in this country, which may hover in 30’s percentage range.

Since the recession began in December 2008, 3.7 million Americans have lost their jobs. Many expatriate Vincentians may also be the victims of this recession, affecting remittance flows to this country.

In 2007, the most recent year for which statistics are available, remittances amounted to EC 60.67 million. This would represent 7.4 per cent, if measured against GDP in that same year.

Expectations will affect investor decisions. Foreign Direct and Private Domestic investment may be deferred until there is a global economic recovery. This crisis of confidence may have implications for the local construction sector, which for many years has been the driving force to the total output of goods and services in this economy for any given year. The Eastern Caribbean Central Bank Report on St.Vincent noted that credit for home construction and renovation amounted to EC$ 245,449,000 in 2008.

Any possible fall in remittances, tourism revenue and activities in the construction sector may lead to increased unemployment and a fall in consumption demand, which may result in an economic downturn in the future.

The effects of the global financial crisis will be ameliorated locally by the fall in commodity and oil prices on the world market. The price of many commodities which are integral to our daily lives such as oil, wheat and Soya beans are falling on the world market due toe weakening demand in China and India.

The annual inflation rate in 2009 may possibly be lower than that of 2007 and 2008 levels. Statistics for the annual inflation rate in 2008 are unavailable, but I do believe it has to have been higher than the annual rate of 8.3 per cent in 2007, given the spike in oil and commodity prices during the middle of that year, which resulted in a price increase for many food items and gasoline in this country.

The external shocks, both positive and adverse, will have a ripple effect in the local economy. However, the positive externalities should be seized upon by the government and business sector. Hedging our bet in the futures market, Statutory Corporations managing foreign currency denominated loans for exchange volatility, sound port folio and risk management strategies, along with prudent fiscal policies, can ensure that any chilling economic effects of the global financial crisis can the contained.