With high debt and large deficits, how will the Caribbean finance its economic recovery?
Unlocking finance for growth in the context of a less favourable global economy is key for Caribbean countries, many of which are facing gaps in financing, heavy debt burdens, and high vulnerability to economic shocks and natural disasters.
Given the large debt burdens faced by many Caribbean countries, financing growth calls for combining public and private finance. To free up greater public financing for growth, continued efforts on fiscal consolidation and structural reforms are essential. There is no doubt that putting the fiscal house in order is a must. But high debt burdens also stem from weak competitiveness, low productivity, low skill levels, high logistics costs and poor connectivity. In this context, St Kitts, Jamaica and Grenada have continued on a path of reforms that are contributing to reduce their high debt burden.
However, in view of the large infrastructure gap and other investment needed, it is clear that financing growth calls for significant private sector participation. So far, levels of foreign direct investment have remained high, but have not translated into much growth. There have been few successful public-private partnership projects, and the local private sector has suffered from low levels of acccess to finance for investments.
Attracting private finance in the face of global headwinds and increasing volatility is not easy, but I see four main areas of interventions that can help unlock private sector led growth. First, a conducive environment for private businesses is crucial.
To attract private investments in productive sectors, Caribbean governments can enhance competitiveness by continuing to improve the investment climate.
Second, the private sector can play an important role in financing infrastructure through public-private partnerships. Policymakers in the region are increasingly turning to public-private parnerships to develop and maintain infrastructure that supports national economic growth and delivers basic services to their citizens.
Third, high and volatile energy costs have been one of the key bottlenecks for competitiveness and private sector development.
Most Caribbean countries depend almost entirely on oil to supply their electricity needs. Oil and gas expenditures represent between seven to 20 per cent of some countries’ GDPs.
Even with oil prices cut by nearly half, the average price of electricity has fallen by less than one third in most countries and remains four times higher than in the United States.
Now is not the time to slow down our efforts. There has been a substantial push in recent years to build a diversified power sector in the region including renewables and other sources of cleaner energy such as natural gas.
Finally, strong financial sectors that grant access to credit, especially for local firms, is another key condition for growth and shared prosperity.
Significant progress has been made to improve financial infrastructure and help banks better manage their credit risks. Going forward, we need to look for other solutions to finance small and medium enterprises and diversify financial instruments. Credit unions are very active in the region, but are mostly focussed on consumer lending. There are very limited financial instruments available to small and medium enterprises besides collaterised lending, such as leasing, factoring or guarantees.
Jorge Familiar is World Bank vice president, Latin America and the Caribbean
