Should the Caribbean be worried about its mounting debt?
Fiscal policy is the counter cyclical instrument par excellence, and it must not be confined to the quantitative control of the public accounts.
Its tools may be of an exogenous nature or they may be endogenous (automatic stabilisers). The strategy for its operation focuses on expanding fiscal space during the upswing of the cycle, by increasing fiscal savings and, above all, by reducing the external debt in order to soften financial constraints and alleviate adjustment needs, a particularly severe problem in Caribbean economies.
In 2013, five of the world’s 20 most indebted countries by public debt-to-GDP ratio were in the Caribbean: Antigua and Barbuda, Barbados, Grenada, Jamaica and Saint Kitts and Nevis.
The total combined debt of the Caribbean amounted to US$46 billion, or 71 per cent of sub regional GDP. Although the severity of the burden varies among countries, the public debt problem is widespread enough to make it a sub regional issue that needs to be urgently addressed.
This situation has been aggravated by a decline in foreign direct investment relative to levels before the outbreak of the global economic and financial crisis in 2008, and by slow economic growth and high levels of unemployment, especially among young people.
The debt challenge is compounded by the slack performance of the domestic private sector, partly due to a reduction in government activity, especially infrastructure investment.
In addition, the sub region is highly vulnerable to extreme events and the burden of the attendant costs for rehabilitation and natural disaster risk reduction. Therefore, compelling arguments abound for a debt relief programme for Caribbean countries, particularly those for which the burden is unsustainable.
Furthermore, the Caribbean’s heavy debt problem was not the outcome of policy missteps. Rather, it is rooted in a series of external shocks, compounded by structural weaknesses and vulnerabilities as small island developing states exposed to natural disasters and the impacts of climate change.
The Economic Commission for Latin America and the Caribbean has proposed a strategy of debt relief aimed at broadening the fiscal space and helping to engineer much-needed economic growth in the member states, while addressing the effects of climate change. Specifically, it proposes a menu approach to tackling the debt problem, since the debt composition is heterogeneous. Some countries have large multilateral debts while others owe a significant proportion of their public debt to private creditors.
First, multilateral institutions would gradually write off 100 per cent of the multilateral concessional debt stock, contingent on approval from donors and on the condition that the states involved place the equivalent amount of the annual servicing of existing multilateral concessional debt, in local currency, in a trust fund over a period of ten years. ECLAC also proposes the establishment of a Caribbean Resilience Fund, which would be used principally for funding climate change adaptation and mitigation.
Second, in the case of countries which owe a sizeable percentage of public external debt to private creditors, a debt buy-back scheme is proposed to reduce both service payments and the debt stock.
Such a scheme would be pursued on the basis of deep discount in the secondary markets and new loan agreements by creditors at lower costs, having regard to continuing borrowing requirements.
Member states would undertake to pursue structural reforms in order to address short- and medium-term challenges. The debt relief would thus be contingent on the fulfilment of obligations to carry out sustainable fiscal consolidation programmes and would be based on agreements between creditors and debtors.
