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The IMF’s Caribbean Report: A Critique by Ronald Ramkissoon Ph.D. Senior Economist, Republic Bank Ltd.

The recent International Monetary Fund (IMF) Report on the Caribbean titled Caribbean Small States: Challenges of High Debt and Low Growth (February 20, 2013) deserves particular attention for some of the things it says, and for some of the things it did not say. As is well known, Caribbean states, to varying degrees, are finding it extremely difficult to make ends meet and states are increasingly turning to the multilaterals, including the IMF, for help. What is the report saying about the challenges of the Caribbean and what are the recommendations? Are these recommendations adequate? Is anything missing?

The Caribbean report, which is part of a larger study titled “Macroeconomic Issues in Small States and Implication for Fund Engagement,” says that most Caribbean small states are facing (i) an extreme version of low growth, (ii) high debt, (iii) significant vulnerabilities, and (iv) limited resilience to shocks. It says further that growth and competitiveness have deteriorated, largely due to low productivity and high costs. It pays particular attention to vulnerabilities, growth and competitiveness and debt. It makes the critical point that cost disadvantages are both structural and policy-driven. In general, I agree with this diagnosis.

So what does the IMF propose for dealing with the Caribbean problems?

  1. 1.Fiscal adjustment is unavoidable but difficult, because of the fiscal and external imbalances and debt overhang etc. In other words, major gaps are due to poor fiscal management, which cannot continue;
  2. 2.A comprehensive growth strategy must replace public sector demand with self-financing, private sector demand;
  3. 3.Work is needed to assess the appropriateness of the exchange rate although, it says, exchange rates are generally overvalued;
  4. 4.States in the Caribbean should be seen as frontline candidates for climate-change funding;
  5. 5.Supervisory and regulatory frameworks in the large financial sector need to be strengthened; and
  6. 6.Debt restructuring must be part of the solution.

The solutions to the problems identified seem simple enough. Or are they? To begin with, after years of overspending, fiscal adjustment is indeed unavoidable and will involve large amounts of pain, which the region has avoided by accumulating debt. Choices with respect to fiscal adjustment, such as tax increases, must be carefully considered to ensure that they do not engender further contraction but in fact help to promote growth. Do Caribbean politicians and their constituents accept that recurrent expenditures will have to be cut and does the citizenry have the necessary understanding of the region’s predicament to endure what is required?  For example, a more business-friendly environment and a bigger role for the private sector through divestment of selected state-owned assets can shift some of the burden off the back of the public sector.  I suggest that we don’t have that understanding at the present time and it would take strong leadership, honest discussions, shared burdens, much effort and some luck to get us to that point.

The second proposed solution, in my view, is also right on target: a comprehensive growth strategy is badly needed and the Caribbean Growth Forum initiative seeks to do just that. In the section on Growth and Competitiveness, the IMF Report notes that “Labour costs are high in the Caribbean, in part reflecting a high degree of unionization, and have grown faster than productivity.” Is the region ready to address this dilemma? I am not so sure, but hope that we might be able to surmount this hurdle of high labour costs coupled with low productivity. My preference is for tying high labour costs to much higher productivity but that might take some time and would not be without some pain. But if that was not enough of a challenge, it is followed by the observation that “electricity costs (in the Caribbean) are also among the highest in the world.…” Investment in alternative and renewable sources of energy seems to be the only way out at this time but additional investment will take time, in which case, efficiency initiatives might be the only short-term solution.

Exchange rates for most of the smaller states in the Caribbean have been fixed since political independence and are indeed analogous to “sacred cows,” notwithstanding that real effective exchange rates are generally overvalued. This fact will not be easily modified.  Two questions arise: are exchange rate changes on the cards, as troubled states increasingly have little choice but to seek external assistance and, how are the affected Caribbean states preparing for that day? Up to now, some states have tried to avoid devaluations by choosing alternative measures, such as export promotions and wage restraints, but these do not seem to have worked well.

Recommendations four and five are easier to implement and, indeed, have had some success in the region over the last few years.

Debt restructuring, the sixth recommendation, is currently receiving increasing attention, as a number of Caribbean states are unable to finance their high debt. Antigua and Barbuda, Jamaica and St. Kitts and Nevis have succeeded in restructuring their debt. Other countries are likely to follow this path but they must move quickly to deal with a problem that has been allowed to worsen.

The challenges are huge and the IMF recognizes that it will need to work with other multilaterals to address them. Further, it recommends a regional approach as it believes that such an approach might be preferred by the Caribbean. In reality, however, states in the region seem to have a demonstrated preference for “doing their own thing”. So how are the urgent adjustments going to come about?

The fact is that Caribbean States are at a juncture where they can no longer ignore the challenges or the IMF recommendations, without rapid descent into some state of disorder. Governments and other groups must engage their populations in honest discussions about the difficult choices that have to be made. This reality is not lost on the authors of the report who guardedly state in the last paragraph: “Countries would have to overcome important political economy constraints to collaborate with the Fund in such a difficult adjustment exercise.” Twenty years ago, a group of Caribbean “wise men” declared in the title of a report on the state of the region that it was “time for action”. What time is it now, I wonder?

April 19, 2013