There is a real prospect that in dealing with unsustainable debt, 11 of 13 Caribbean small states will have lost the first three decades of the twenty-first century, and foregone opportunities for poverty reduction, transformation and growth.
That judgement has been made by a leading development-economist who has studied and worked on small economies. Cyrus Rustomjee is a South African-born, former head of the Economic Affairs Division of the Commonwealth Secretariat. In that position, he produced well-considered papers for the G20 on the development challenges confronting developing countries.
His recent study, “Pathways through the silent crisis: Innovations to Resolve Unsustainable Caribbean Public Debt”, was commissioned by the Centre for International Governance, an independent think-tank located in Canada.
Losing “the first three decades of the twenty-first century” is a grim prospect. That’s practically an entire generation of Caribbean people. As Rustomjee points out, the problem is not that debt accumulation and debt servicing pose an intrinsic threat to poverty reduction, growth and development; but unsustainable high debt and debt servicing levels do.
Promoting development by raising loans has been a useful tool for many countries throughout history. Judicious levels of debt have contributed to growth through their investment in productive enterprises that produced revenue streams to repay borrowings. But when debt is used to pay for recurrent expenditures from which there is no return, the level rises with no means of repayment.
The cost of debt service has become so high that it severely constrains the spending capacity of governments to provide goods and services immediately needed by their people, and to invest in projects for economic growth.
Both the International Monetary Fund (IMF) and the World Bank have suggested that a debt to GDP ratio above 60 percent is dangerous, since debt servicing would absorb such a high portion of revenues that governments would be left with little to provide the goods and services their people expect. And that is precisely the problem that many Caribbean governments face.
As the situation stands, at the end of 2016, only 2 of the 14 independent Caribbean Community (CARICOM) countries had debt to GDP ratios under 60% – Guyana and Haiti. The 12 with ratios over 60 percent were: Antigua and Barbuda 92.1%, Bahamas 66.9%, Barbados 107.9%, Belize 98.6%, Dominica 81%, Grenada 84.4%, Jamaica 115.2%, St Kitts-Nevis 65.8%, St Lucia 82.6%, St Vincent and The Grenadines 79.2%, Suriname 64.6% and Trinidad and Tobago 61%.
Troublingly, six of these countries experienced an increase in their debt to GDP ratios over their 2015 performance. Those countries are: Bahamas, Barbados, Belize, St Lucia, Suriname and Trinidad and Tobago.
The causes of the high debt to GDP ratios in Caribbean countries are many; poor policy choices by some governments are among them. But, it is important to note that in seven of the largest debtor countries, Rustomjee’s study shows that debt rose due to the following things: infrastructure reconstruction after natural disasters; reduction in aid; little or no access to concessional financing, forcing governments to borrow on tough commercial terms; erosion of European Union trade preferences since the early 1990s; and the impact on tourism of the global economic crisis which began in 2008.
He might have added the region’s large annual trade deficit with the United States, its largest trading partner, that reached US$5.2 billion in 2016 with a serious decline in Caribbean exports, including under the duty-free provisions for some goods of the Caribbean Basin Economic Recovery Act.
Indeed, were it not for low-cost loans and grants particularly from China and Venezuela, and also from Taiwan in respect of three of them, the circumstances of these countries would have been much worse.
Projections are that, on its present course, by 2020, debt will remain unsustainable in 11 Caribbean small states, and there will be no change in 2030 when the UN’s Agenda for Sustainable Development will have run its course.
Unless the international community responds appropriately to this grave problem, these countries will not only lose the first three decades of the 21st Century, thereby witnessing a reversal in the advances they have made, but poverty and unemployment will increase and opportunities for economic growth will by-pass them.
Other countries in the region will not be immune from the consequences. All reside in the same neighbourhood, and none can pick-up itself to move to a more desirable location. The adverse consequences in one will spill over into the others, in the form of economic refugees, job seekers and crime. This trend has already begun.
As bad as it may seem, the problem of high debt to GDP ratios is not insurmountable. But, it requires creative thinking and commitment from governments and the international community, including re-opening concessional financing from international financial institutions; external creditors, agreeing to write-off or reduce their loans; governments setting an annual cap on borrowing; and swapping debt for climate change adaptation and mitigation.
Caribbean countries with high debt to GDP ratios are not without sound argument to encourage international responsiveness to their plight. These countries did not create Climate Change; they are the victims of the profligacy of the industrialised nations but they have to pay for reconstruction by incurring debt. Further, they are markets for the goods and services of others with little compensation. And, some of the debt they acquired was used to fight drug trafficking that contributed to the well-being of others.
Regrettably, there has been no promotion of such international cooperation, largely because, so far, Caribbean countries have soldiered-on, maintaining political and social stability and avoiding economic calamity. And the region itself has done little to place the issue on the international agenda and argue it forcefully.
The contention will be made that CARICOM countries must first show themselves willing to reduce their debt. Well 6 countries did so in 2016: Antigua and Barbuda, Dominica, Grenada, Jamaica, St Kitts-Nevis and St Vincent and the Grenadines reduced their debt from the previous years.
Their effort has shown what is possible, and as the catalyst for encouraging an international response, it has to be replicated across the region particularly by the 6 whose debt to GDP ratios increased.
The alternative is to strangle a generation.
(Sir Ronald Sanders is Antigua and Barbuda’s Ambassador to the US and the OAS. He is also Senior Fellow at the Institute of Commonwealth Studies, University of London and Massey College in the University of Toronto. The views expressed are his own)