Transcript of an Interview on the Challenges facing the Eastern Caribbean Region with Agustín Carstens, Deputy Managing Director, IMF

December 2, 2005

Transcript of an Interview on the Challenges facing the Eastern Caribbean Region
with Agustín Carstens, Deputy Managing Director
International Monetary Fund
Washington DC, December 2, 2005

Questioner: Mr. Carstens, thank you very much for offering up the time to chat with us. I'm Michael Christie, Reuters Bureau Chief for Southeastern U.S. and the Caribbean. I'd prefer, of course, to travel with you to the islands ...

Mr. Carstens: Yes, I'm sure it will be a good experience.

Questioner: This is your first trip there, I understand. Could you give me your broad views on the main challenges that face these small islands, ranging from natural disasters to the enormous debt load to the challenges of globalization, say from the trade preferences from the European Union being eroded. What can the IMF do, or what is it doing, to help these countries? They seem to be doing a lot themselves but I wonder if they have all the tools they need to cope.

Mr. Carstens: To start with, I think that in the last few years the IMF has made an effort to strengthen our relationship with the Caribbean region and with the Eastern Caribbean Currency Union (ECCU).

I think all the member states of the ECCU face important challenges, many of which have been created over many years and have ended up in a situation that requires concerted and very determined action to move forward.

I think that in your question you pointed out pretty much all the main challenges that they face. One is the situation of very high debt which certainly would require fiscal discipline. But they are also facing important challenges in the real sectors of their economies, which at some points in time makes it difficult to move forward with the fiscal consolidation.

The issues of natural disasters, as you mentioned, is certainly a factor that for the medium-term needs to be taken into account, and that has more than once put pressure on these countries on the fiscal side.

At the same time, as you also remarked, they are facing steep competitiveness issues from the fact that the trade preferences have been eliminated. That creates pressure for generating other alternative economic activities. But the issue of relatively high labor costs makes it difficult for them to compete, even in areas where they have natural advantages, such as the advantages in the tourism market that come from the beauty of the islands.

So what we're trying is to help the countries put together a medium-term strategy where the fiscal pressures can be brought under control so that they would not be an impediment to growth.

We're also helping them put together a plan to address the issue of competitiveness, to be able to attract foreign direct investment, and induce further development of the private sector in areas that would give them other growth opportunities. We're preparing them to embrace fully globalization.

Our role has been mostly through policy advice and a very frank dialogue, through technical assistance, and in some cases through financing. We have a program with Dominica and we have extended a natural disaster emergency assistance loan to Grenada.

There are other possibilities of financing. The Fund has just approved an Exogenous Shocks Facility that would allow us to respond in a more expeditious way to shocks and that would be available for these countries in the future. There is a range of facilities that are available to these countries but it is up to them to subscribe to them.

While the challenges that the countries face are very deep, in many aspects there has been progress. I think the dialogue that we have had with them has been very good to arrive at a shared diagnosis.

The main purpose of my trip would be to discuss with the authorities, with the Prime Ministers and Ministers of Finance and the Governor of the Eastern Caribbean Central Bank, how we can fine tune our collaboration with them. I would also like to hear from them with more precision what challenges they think they face and what are their priorities. How can we redirect our interaction with them for it to be more fruitful?

Questioner: Can you elaborate on how you can help these countries with their competitiveness issues?

Mr. Carstens: Mostly we have been trying to engage with them to see how they can diversify their economic base. We have the situation that important sectors like sugar and bananas developed through trade preferences. That is, as we have seen, not a self-sustaining activity. Therefore it's important for them to find alternative activities.

Also, in terms of tourism, there are issues associated with labor costs that it is important for them to address, to give more importance to the labor market issues and so on.

This is a challenge that the Fund by itself cannot address, but we have also to engage with other international financial institutions like the World Bank to really be able to propose to the countries other alternatives.

Recently, the World Bank finished a study that focuses precisely on this issue of competitiveness. We will collaborate with them on finding ways to deal with the issues of labor costs; how education can be enhanced and targeted to develop skills that will give an advantage to these countries; how to link agriculture with the tourism sector; and so on.

Also, another aspect, given the scale of these countries, is that it is extremely important to induce more regional integration and cooperation. Here in the IMF we have precisely been looking at the region as whole. Obviously you have to pay attention to each individual country, but following our regional approach I think is [also] important. In that way we shed some light for them on how to increase regional cooperation and integration.

Questioner: Do you think the Fund's approach to the Caribbean can perhaps be applied to the Pacific, or to other micro states around the world, where standing alone they are going to fall, but if they integrate they might be able to survive some of the shocks they face?

Mr. Carstens: Yes, absolutely. I think this is a very important point has followed from the work with the Caribbean. In Central America, they also have a long-lasting tradition of trying to integrate themselves, and they even have some institutions moving in that direction. There are issues that are bringing them together like CAFTA.

It is obvious that economic forces, even without a particular program or plans by the government, are unleashed, and that forces tend to move to integration by themselves. So the issue is: how to take advantage of this energy to really improve the resilience of these economies?

Questioner: Would the Exogenous Shock Facility—which I've to admit I am not totally familiar with—be also an instrument to respond to natural disasters or other shocks of the sort we were talking about from the global economy?

Mr. Carstens: No, it is also open to natural disasters.

Questioner: And the idea is to provide emergency financing for countries in events they face that basically deprive their government of money?

Mr. Carstens: Mostly, as you know, the main focus of the Fund is on balance of payments needs. Oftentimes small economies face exogenous shocks that could be as a result of a fall in commodity prices or natural disasters—these can create an important balance of payment need. So, this Exogenous Shock Facility has the objective of having a quick response to those circumstances. This is a facility that has been very recently been approved by our Board and is becoming operational in the coming months.

Questioner: Will you advice countries such as Grenada to apply for that facility to make up for the revenues or that sort of thing?

Mr. Carstens: Well, I think it's a facility that would work going forward. I think the impacts of previous disasters are in the process of being taken care of. But, you know, it's good for the countries to know that this facility exists and certainly we will mention it to the authorities so that they aware this instrument exists.

Questioner: Following up on that, what is your general summary of how Grenada is recovering?

Mr. Carstens: Well, we have been pleasantly surprised by all the actions undertaken by Grenada. I think the magnitude of shock they faced was remarkable, damage of 200% of GDP [from Hurricane Ivan].

But I think society has responded very well. The international community, including the IMF, has given grants and loans. The country has been able to obtain debt relief through a successful debt restructuring agreement. The country's own fiscal efforts have put the economy back on track where I think we can see growth exceeding 6% in the near future, helped by the reconstruction boom and preparation for 2007 Cricket World Cup.

I think the economy is reaching a point where the attention of the government is shifting to putting together a medium-term economic program to boost growth and alleviate poverty. You know, after operating in an emergency mode, it is important to focus on important medium-term issues. So, a lot of our discussion will focus on how we support them in this effort.

Questioner: And I presume one of the things that you will encourage them to do, given that the nutmeg crop is largely destroyed, is to diversify.

Mr. Carstens: Yes, of course.

Questioner: And Dominica, which also pursued a large debt restructuring program and other economic reforms, what's the outlook for them?

Mr. Carstens: I think the economy has shown a remarkable turnaround in its performance. Growth has recovered and inflation is subdued. We have also certainly seen, particularly, an improvement in public finances. With the government's fresh mandate in 2005 in the elections, this provides a good environment and a good opportunity to push reforms ahead.

Of course there is the social dimension: social conditions remain difficult, but they will improve if macroeconomic stability is maintained and structural reforms are accelerated. Certainly, we want to praise the work that the people of Dominica have done.

So, the progress that has been shown should be an incentive to address the challenges for the future. Here, basically, we have to mention some structural rigidities, for example in the electricity sector or the land system, that are holding [back] growth. Some other issues still need to be addressed on the fiscal areas, especially the unfunded liabilities of the social security system.

But, certainly, it is encouraging to work with countries like Dominica, where progress is being made. And that progress should provide energy for further reforms.

Questioner: It should also be encouraging for the Fund that the election was won by someone supporting the economic program as opposed to somebody arguing against the economic program.

Mr. Carstens: Absolutely, it is encouraging, but also implies the need for us to continue engaging in a smarter and more consistent way.

Questioner: Soaring fuel prices must be one of the greatest challenges faced by these countries right at the moment?

Mr. Carstens: Of course, no question about it, that's for sure.

Questioner: So my final question was about some concerns about the PetroCaribe initiative by Caracas, which in the short term may be helping the Caribbean countries to cope with high fuel prices. But some analysts are concerned that it might increase the long-term debt burden of countries with debt of already more than 100% of GDP. I was wondering if you have a view on that.

Mr. Carstens: Overall, we have to look into this [initiative] in more detail. What you said is exactly what we are trying to figure out now: how is this affecting the medium-term? I mean, right now, given the prices of oil, countries all over need to tackle this issue, not only in the Caribbean. Venezuela is offering a particular way to deal with this issue, and they are taking advantage of that. I think we need to support them in that respect.

Part of the idea of this trip is to gain more knowledge about this PetroCaribe deal. We still don't have some details available to us and we would like to analyze them. Certainly, we will make countries aware—for example, as we just commented, in the cases of Grenada and Dominica that been in the process of debt restructuring—that you want to be very careful in terms of how to manage debt in the future. But, yes, we will look into this and will try to get more details on this.

Questioner: Well, thank you, I really appreciate your time and your thoughts. Are there any other particular topics that you will like to address that I haven't mentioned?

Mr. Carstens: No, I think for this stage [of the trip] our conversation has been quite complete. I want to underline that this is the first time in recent years for a senior management official from the IMF go to the region. Part of it is to enhance my knowledge of the region, to listen, and that will help us in the institution to reshape our interaction with the countries. So, after my trip, you might be interested to talk again.

Questioner: Yes, thank you.


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