WASHINGTON – An International Monetary Fund (IMF) working paper says since growth in the current global economic environment is “virtually nonexistent,” significant fiscal consolidation is inevitable in the Caribbean.
The paper, dubbed The Challenges Of Fiscal Consolidation And Debt Reduction In The Caribbean, examines debt dynamics in the Caribbean and discusses policy options for reducing the high debt levels.
Based on empirical studies of factors underlying global large debt reduction episodes, the paper says “important policy lessons” are drawn for the Caribbean.
The analysis shows that major debt reductions are associated with strong growth and decisive and lasting fiscal consolidation efforts.
It says better control of the public wage bill, increasing public sector efficiency and tackling transfers are the obvious targets to reduce spending.
On revenue, the working paper says there is “ample room” to reduce tax expenditures and eliminate distortions while broadening the tax base.
“Fiscal consolidation needs to be complemented by a comprehensive debt reduction strategy including tax policy reforms and structural reforms to boost competiveness,” the paper urges.
It states that Caribbean economies face high and rising debt to Gross Domestic Product (GDP) ratios that “jeopardize prospects for medium-term debt sustainability and growth.”
The working paper points out that the global financial crisis “worsened the already high debt burdens in the Caribbean,” adding that the crisis and subsequent slow recovery in advanced countries had a “significant adverse effect undermining growth in the largely tourism-dependent Caribbean, exposing balance sheet vulnerabilities built up over many years.” (CMC)
