Caribbean economic problems

by Nilio Gumbs 01.APR.10

The Caribbean islands are faced with the worst economic fallout probably since the 1930’s. Every country in region is experiencing fiscal deficits as a result of the global economic and financial crisis.{{more}}

Rising expenditure and declining revenues and remittances have affected the governments in the region ability to pay salaries and meet their high indebtedness.

The high indebtedness of Antigua, EC$3.1 billion, has virtually made it impossible for that country to borrow on the regional and international capital market. The Government had no other choice but to negotiate a US$124 million loan agreement with the International Monetary Fund.

Six of the ten worst indebted countries in the world are found in the Caribbean, limiting their ability to borrow regionally and internationally and in the process forcing some to turn to the IMF where conditionality will apply.

Jamaica, before Antigua, had negotiated a US$1.27 billion agreement with the IMF, to meet rising government debt, weak economic growth and the impact of the global economic and financial crisis. The agreement with the IMF entails the reform of the public sector to substantially reduce the large budget deficit, a debt strategy to reduce debt servicing costs and reforms to the financial sector to reduce risks.

As part of its restructuring effort, the Jamaican government has signaled its intention to downsize the Civil Service by ten thousand to reduce recurrent expenditure.

In the Turks and Caicos islands, the Chief Administrative Officer of the interim administration has informed all public employees that salaries and other allowances excluding housing would be cut by 10 percent in attempt to rein in expenditure.

In Antigua, the Finance Minister announced that the country must reduce government spending on salaries by 20 percent by 2012.

The impact of the economic and financial crisis in major developed countries has affected the Barbados economy also, resulting in the contraction of real output, a reduction of foreign exchange inflows and an increase in unemployment.

The fiscal imbalances that exist in Barbados, Antigua and Jamaica are found in all Caribbean countries resulting in the inability of governments to pay for services provided by local suppliers, further stifling economic activity.

The root cause of the situation in Caribbean economies is that government expenditure seems to be mounting while tax revenue is declining. In Barbados, the government revenue was 10 percent less than forecast. The government’s tax revenues have fallen by 9.6 per cent during the first nine month of fiscal year 2009/10 resulting in a fiscal deficit of Bds$480.9 million.

Many governments are trying to weather the economic storm, hoping for a full recovery from the global economic and financial crisis in industrialized countries. They are trying to stall as long as possible from going to the IMF.

St.Kitts and Nevis Prime Minister Dr Denzil Douglas in his recent budget speech noted that “his country has no choice but to turn to the IMF for financial assistance.”

St.Vincent and the Grenadines may find itself in an awkward position, in that it is in an election year, making it uncomfortable for the government to go to the IMF.

These small economies are difficult to manage and require sound management from day one. Unfortunately, some of the problems faced by these countries have been self inflicted through blatant mismanagement and wasteful expenditure.

The conditionality imposed by the International Monetary Fund may be a bitter pill to swallow by many governments and people of the region. There is the old saying “he who pays the piper call the tune”.