Since 1990, the island states of the Eastern Caribbean Currency Union (ECCU) have seen their incomes grow at under 3 percent a year, less than half the rate of income growth in the 1980s. In recent years, sluggish growth has been compounded by rising indebtedness. What can be done to reinvigorate growth and address the region’s high debt? A seminar—organized in Washington, D.C., in December 2004 by the Eastern Caribbean Central Bank (ECCB) and the IMF’s Western Hemisphere Department—examined possible steps.
“The ECCU countries face a particular dilemma,” said Sir K. Dwight Venner, Governor of the ECCB, in his opening address. Their populace expects high living standards because of the demonstration effect that is exerted by North American tourism and migration. And the “liberal democratic political system puts considerable pressure on incumbent governments to meet these expectations and on opposition parties to promise to exceed whatever governments are doing.”
Venner pointed to the region’s currency union—the EC dollar has been pegged to the U.S. dollar since 1976—as one factor that has helped the region’s macroeconomic performance. The currency union has produced, he said, “a low rate of inflation as well as the confidence and credibility needed to support investment and economic growth.”
At the same time, Venner said, the ability to provide strong income growth is constrained on the supply side. These are small countries, with small populations and few natural resources. They are also situated in a region subject to frequent natural disasters. In fact, according to a recent study by the IMF’s Tobias Rasmussen, this is the most disaster-prone region in the world. Smallness also puts these countries at the mercy of global economic forces, Venner said, which can often be as implacable as the forces of nature. These island economies are quick to feel the effects of higher energy prices, rising global interest rates, global security concerns that dampen tourism, and the erosion of trade preferences in developed country markets.
Some of these size-related concerns, suggested Ratna Sahay, who leads the IMF’s regional surveillance missions to the ECCU countries, could be addressed through further regional cooperation and integration. Such steps could expand small national markets by promoting greater mobility of labor, capital, and goods, and by helping to economize on fiscal resources through the collective provision of some government services.
Currency union: a “high maintenance” choice
While pointing to the ECCU’s track record of macroeconomic stability, IMF Deputy Managing Director Agustín Carstens cautioned, however, that currency union was a “high maintenance” choice. Preserving a fixed exchange rate requires fiscal discipline, flexible factor markets, and a strong financial system, but in recent years, he noted, debt has risen rapidly in most ECCU countries and has now reached very high levels.
In four countries—Antigua & Barbuda, Dominica, Grenada, and St. Kitts & Nevis—the debt-to-GDP ratio has almost doubled since 1998 and outstanding public debt now exceeds the countries annual income. David O. Robinson, IMF’s mission chief to Antigua & Barbuda and St. Kitts & Nevis, highlighted the different paths these two countries took to debt buildup. In St. Kitts & Nevis, policy slippages—especially the failure to address the loss-making state-owned sugar industry— were exacerbated by three recent natural disasters. For Antigua and Barbuda, indebtedness followed years of fiscal profligacy and a lack of transparency. In Grenada, debt problems had their roots in a government decision to assume private debt that was then compounded by the effects of Hurricane Ivan in September 2004, according to Prakash Loungani, the IMF mission chief for the country. Dominica’s experience offers a striking contrast. Alejandro Santos and Sanjaya Panth, two successive IMF mission chiefs to the country, documented how decisive actions by the authorities, taken in the context of an IMF-supported economic program from December 2003, quickly produced a virtuous circle of increased investor confidence, faster growth, and improved fiscal positions.
Dealing with debt
Achieving a sustainable debt burden, said Matthew Fisher, a Senior Advisor in the IMF’s Policy Development and Review Department, requires a comprehensive macroeconomic framework that combines fiscal measures, growth-promoting structural reforms, asset mobilization, and international donor support. “There should be no illusion that restructuring provides an easy way out.,” Fisher said. Debt restructuring—currently under way in Dominica and being considered in Grenada following Hurricane Ivan—should always be used as a last resort and only as part of a comprehensive and credible macroeconomic strategy.
In this context, Sean Hagan, Director of the IMF’s Legal Department, and Carlos Medeiros, Division Chief in the IMF’s International Capital Markets Department, noted that countries considering debt restructuring would benefit from pursuing a preemptive and collaborative agreement with creditors to help restore confidence quickly and limit spillovers to the real and financial sectors of the economy. A key part of the debt-restructuring strategy is to ensure the viability of the domestic financial system following a debt restructuring, emphasized David Hoelscher, a Division Chief in the IMF’s Monetary and Financial Systems Department.
Slow growth …
Average growth for 1990-2004 is less than half that of the 1980s
Data: IMF staff estimates.
Wendell Lawrence, Financial Secretary for St. Kitts & Nevis—one of the 12 officials from the ECCU region who participated in the seminar—welcomed the IMF staff’s presentations as a good checklist of what to do and what to avoid for a country considering debt restructuring. Carstens underscored the IMF’s willingness to work closely with the ECCU countries to restore debt sustainability, a message reinforced by the IMF’s Executive Director Kevin Lynch, whose constituency includes the ECCU region, and by Anoop Singh, Director of the IMF’s Western Hemisphere Department.
Fiscal adjustment can help
Creditors are more likely to agree to a restructuring if they are convinced that the country is taking strong fiscal measures to prevent a recurrence of the debt buildup. Are large fiscal adjustments viable options for the ECCU states to reduce their debt? Mark Flanagan, an Economist in the IMF’s Fiscal Affairs Department, examined the experiences of 165 countries during 1971-2001. He found that many countries undertook large fiscal adjustments during this period and that the relatively more enduring episodes were marked by recurrent expenditure restraint and were set against a background of relative political stability. In general, such adjustments did not lead to even a short-term decline in growth.
Large fiscal adjustments are thus possible in the ECCU countries and are indeed being undertaken—in Dominica, for instance. But their success depends on winning public support for them. Formulating economic policy in a transparent manner, for instance through town-hall meetings with the public, could help build support for difficult reforms. Venner said that such outreach was essential to preserve one of the strengths of the ECCU member states, their “liberal democratic systems and respect for citizens’ rights of expression.”
Four IMF Executive Directors participated in the seminar: Lynch; Pier Carlo Padoan, whose constituency includes Italy; Moises Schwartz, whose constituency includes Mexico; and Nancy Jacklin, who represents the United States. Lynch lauded the IMF’s efforts “on behalf of some of its smallest members,” adding that these efforts “provide a concrete example of its genuine commitment to improving growth prospects and living standards across its entire membership.” Venner concluded that the seminar reinforced an ongoing “process of engagement that begins with stabilization and the challenge of the debt overhang and moves to the matter of achieving sustainable development” of the ECCU countries.