Global and Regional Challenges to Caribbean Economic Development - 2016 High Level Caribbean Forum on Shifting Tides: Challenges and Opportunities
IMF News, November 2, 2016
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- Published: November 2, 2016
Introduction
- Speaker: Tao Zhang, IMF Deputy Managing Director.
- Event: 2016 High Level Caribbean Forum.
- Date: November 2, 2016.
- Context and acknowledgments:
- Expressed condolences to victims of Hurricane Matthew, particularly in Haiti.
- Thanked Prime Minister Rowley and the government of Trinidad and Tobago for hospitality and co-hosting.
- Noted visit to the University of the West Indies and examples of local innovation (steel pans, cocoa production).
- Forum theme: "Shifting Tides" — focus on challenges and opportunities from changing global and regional trends.
Global Challenges
- Global growth and outlook:
- "2016 is proving to be another year of lackluster growth."
- World Economic Outlook (released early October) projection: global growth at 3.1 percent this year, with risks weighted to the downside.
- Three key global trends influencing near-term outlook:
- Commodity prices:
- Trend decline since 2011 in commodity prices appears to have bottomed out.
- Expectation: prices to remain at low levels and volatile going forward.
- Advanced-economy recoveries and uncertainty:
- U.S. recovery has been softer than previously expected—although there has been a further uptick in activity, more recently.
- Uncertainty has risen in Europe as countries manage economic recovery and the process of Brexit.
- Financial conditions and regulation:
- Global financial conditions have eased and global financial regulations tightened.
- Interest rates in advanced economies are expected to remain low.
- Efforts to strengthen AML/CFT (anti-money laundering and countering financing of terrorism) have intensified.
- Implications for Caribbean economies:
- Low and volatile commodity prices:
- Negative impact on oil exporters like Suriname and Trinidad and Tobago; Trinidad’s economy under pressure despite some savings during the good times.
- Positive impact for oil-importing countries: improved external positions (example: Jamaica eliminated much of its double-digit current account deficit in just a couple of years; Guyana experiencing its first external surplus in decades).
- Continued need to improve efficiency of domestic power utilities, reduce reliance on government subsidies, and expand renewable energy.
- Slower recovery in U.S. and Europe:
- Pickup in tourist arrivals in the last two years could reverse in tourism-dependent Caribbean economies.
- Projections: Euro Area to grow by only 1.7 percent this year and 1.5 percent in 2017; United Kingdom projected to grow by a modest 1 percent next year. Significant risks around these projections due to unclear impact of Brexit.
- Noted recent data showing higher-than-expected third quarter growth rates in both the U.K. and the U.S. could provide room for optimism.
- Financial and monetary implications:
- Slower global growth delayed normalization of monetary policy in advanced economies, enabling continued easy financial conditions for the rest of the world.
- Low world interest rates help reduce debt servicing costs for Caribbean countries with high debt.
- Tighter global regulations create challenges: withdrawal of correspondent banking relationships (CBRs) by international banks is affecting Caribbean banks and clients.
- Consequences: loss of some or all correspondent banking relationships across the region; international banks stopping services and dropping clients deemed “high risk”; challenges for participation in global payments system; negative effects on remittance-dependent households.
- Example: In Belize, the problem has reached systemic proportions with bank assets equivalent to almost half of GDP being affected.
- Identified causes: gaps in regulatory and supervisory frameworks in some affected countries.
- IMF response: providing technical assistance to strengthen frameworks; advocating dialogue among countries, regulators, and banks; promoting increased information exchange, capacity building, and sharing best practices.
Regional Challenges
- Natural disasters and climate change:
- Hurricane Matthew underscored importance of preparation and mitigation.
- Climate change will make catastrophic events more frequent and intense; recurrent droughts and rising sea levels will affect agriculture, fisheries, coastlines, and biodiversity.
- IMF studies propose a policy framework for enhancing resilience in small states, emphasizing:
- Greater focus on risk reduction and preparedness (in addition to response and reconstruction).
- Exploring avenues to finance prevention policies, including possibly through fiscal buffers, contingent financing plans, and risk transfer arrangements.
- Banking sector vulnerabilities:
- Financial sectors in some Caribbean countries suffer from poor asset quality, low profitability, and insufficient capital.
- ECCU countries have taken steps to enhance banking sector resilience: banking legislation and resolution of three insolvent banks.
- Further reforms required: strengthening supervision and increasing capital of indigenous banks.
- Impact of U.S.-Cuba rapprochement:
- Concern that U.S. tourism could flow to Cuba at the expense of other Caribbean destinations.
- Noted regional resilience and precedent (Dominican Republic emergence as a tourist destination).
- Forum to discuss converting this challenge into an opportunity by preparing to improve destinations and strengthen competitiveness.
Policy Responses
- Ongoing and needed reforms:
- Competitiveness:
- Persisting challenges from 2012 Forum: enhancing labor productivity and reducing energy costs remain relevant.
- Many countries are making renewable energy and reduced energy costs part of growth strategies; implementing potentially far-reaching energy reforms.
- Continued need to boost energy efficiency and improve labor productivity to foster competition and growth.
- Fiscal adjustment and debt management:
- Fiscal adjustment can be difficult to sustain amid weak growth; this remains the case.
- Success stories: Jamaica, Grenada, and St. Kitts and Nevis have reduced fiscal and external vulnerabilities in recent years; Trinidad and Tobago is pursuing similar goals.
- Current global financial environment with low interest rates provides a window of opportunity to:
- (1) pursue adjustment,
- (2) undertake liability management to lower financing costs,
- (3) reduce debts to safer levels.
- Emphasis: fiscal and macroeconomic stability are necessary but not sufficient; country-specific structural reforms are needed to secure growth dividends.
- Structural reforms and sustained effort:
- Progress on growth, diversification, competitiveness, energy efficiency, financial sector vulnerabilities, and fiscal adjustment has been incremental—reflecting complexity and need for sustained policy effort.
- Additional risks to monitor:
- Brexit-related risks and further spread of the Zika virus could affect tourism.
- Developments in Venezuela could carry important effects for members of the PetroCaribe agreement.
- IMF support:
- Committed to supporting policy reforms, reconstruction efforts, policy advice, technical assistance, training, and financing.
- Example: Jamaica announced a staff-level agreement for a successor arrangement to its Fund-supported program focusing on growth and job creation by tackling structural bottlenecks including public safety.
- Highlighted Jamaica’s Economic Growth Council as an example of private-public cooperation. Similar lessons cited from Fund-supported programs in Grenada and St. Kitts and Nevis.
Conclusion
- IMF commitment:
- Reiterated deep commitment to work with Caribbean countries; support policy reforms and reconstruction.
- Affirmed intention to build on prior Fund engagement in the region and to strengthen engagement under the Deputy Managing Director’s term.
- Outlook:
- Pledged continued cooperation to address new challenges and find solutions through policy advice, technical assistance, training, and financing.
- Looked forward to productive discussions at the Forum and future visits.
Tao Zhang, IMF Deputy Managing Director — Speech, November 2, 2016