Economic parallels: Greece and St.Vincent

Fri, May 21, 2010

Editor: The financial situation in Greece has caught the attention of the world, including the President of the United States, as it comes so soon on the heals of a partial recovery from the global financial crisis and economic recession.{{more}}

The country is having difficulty meeting its debt repayment obligations. It was due to make a payment of US$62 billion on May 19, 2010, and was not able to, without assistance from Germany, European Central Bank, and the International Monetary Fund. Any default on its repayment obligation can have the same global impact as previous crisis in Mexico, Argentina, South east Asia or Russia debt defaults.

Greece, a midsize economy by the developed world standards, with a population of 11 million people, is experiencing a fiscal problem. The statistics on the Greek economy reveal that it has a national debt of around US$400 billion. The budget deficit as a percentage of GDP is 13.6. In essence, public expenditure has exceeded tax revenues by that percentage of the gross domestic product – the output of goods and services the country produces in a given year.

The national debt – money borrowed by the state as a percentage of gross domestic product is 115.1 percent. The European Union requires the deficit be kept below 3 percent for countries using the Euro.

The national debt for 2010 is expected to stand at $464 billion, and GDP is expected to be 348.6 billion.

According to the BBC, “over the last decade, the former Greece government went on a spending spree, where public spending soared and public sector wages nearly doubled.” It must be remembered that they also hosted the Summer Olympics in 2004, for which massive infrastructural work was put in place at considerable cost.

The crisis in Greece should bring home to Caribbean governments the need for fiscal prudence and sound economic management.

Six of the world’s most indebted nations per capita are found in the Caribbean. Practically all independent Caribbean countries have debt to GDP ratios above 50 per cent.

So are there parallels in the Caribbean with the Greece debt crisis? And what lessons can be learnt from the Greek debacle.

The Leader of the Opposition in St.Vincent and the Grenadines in his discourse on a popular radio programme keeps lamenting that he expects to meet a fiscal situation far worse than is presently portrayed by the government, if his party wins the upcoming election, and that the economy of this country is in a serious crisis.

St.Vincent has a debt of EC$1.190 billion and a debt to GDP ratio of 60 or 70 percent, based on which measurement the government uses. Repayment of the debt in 2010 will amount to EC$148 million. The gross domestic product fell by 5.8 percent in 2009 as the global recession hit. St.Vincent’ GDP in 2007 amounted to EC$1,207 in current prices.

Greeks as previously noted hosted the Summer Olympics in 2004, undertaking massive infrastructural works in stadiums and road works at considerable cost.

Can we in St.Vincent and the Grenadines equate some of the projects undertaken or in progress to that of Greece, which was the smallest country to host the Olympic games? This must be viewed on a per capita basis, given the relative size of the two economies.

The government has renovated the Arnos Vale playing field to the tune of over EC $50 million and is attempting to undertake the construction of an international airport to the tune of EC$600 million, based on government projections. The opposition NDP argues that based on their calculations it will exceed EC$1 billion in cost.

Many Vincentians have argued that the present state of the Vincentian economy is as a result of government trying to build an airport on its own, which is highly impossible, causing other sectors of the economy to suffer and decline. More so, expenditure on the airport is not trickling down into the economy, as most of the work is done by Cubans, with limited employment opportunities for Vincentians

In the last 10 years, public sector wages doubled in Greece, contributing to the budget deficit. In St.Vincent and the Grenadines, public expenditure increased significantly in the last 9 years. Salaries of public sector workers were significantly increased in the reclassification exercise. The number of Vincentians receiving public assistance has doubled to over 6,000 in the last nine years, opponents of the government have argued.

It is the belief of many that St.Vincent and the Grenadines may have to follow the path of Jamaica and Antigua and seek financial help from the International Monetary Fund with its many conditionalities.

The Greek government has introduced several austerity measures to reduce the budget deficit. It wants to freeze public sector workers’ pay for 3 years, scrap bonus payment for public sector workers and raise value added tax. It has also announced a rise in petrol prices.

St.Vincent and the Grenadines may have to undergo its own austerity measures after the next general elections to restore the economy to a more sustainable footing.

Ati Gipson