The debt of small Caribbean states has been unsustainable for some time now and, unless it is tackled effectively, it will further retard their economic growth and the quality of their human development.
Average public debt levels for Caribbean small states now amount to about 84% of GDP with five countries experiencing debt-to-GDP ratios of close to 100% and higher. These countries are: Jamaica, St Kitts-Nevis, Grenada, Barbados and Antigua and Barbuda.
Models produced by experts find that as the debt levels in Caribbean countries reach 30% of GDP the effects on economic growth are positive, however once the levels reach 55% of GDP, the impact of debt on the rate of economic growth becomes negative. This has become obvious in those Caribbean countries where debt levels are over 80%. There is either no economic growth or such minimalist growth as to be of no good effect.
In 2011, the Eminent Persons Group (EPG) of which I was a member highlighted this problem to then 54-member Commonwealth of Nations whose Heads of Government had commissioned us to advise on reform of the Commonwealth.
Observing that the debt problem in small states was already serious before our report, we said: “The situation is worse now. Unemployment and poverty have risen in many of them with attendant increases in social dislocation and crime”.
We called on governments to take advantage of the Commonwealth’s Debt Recording and Management System software to improve their debt management. At the time of writing, I am unsure how many Caribbean small states did take advantage of the software. What is known is that many of them increased their debt substantially since that report.
It is also known that high debt has had an adverse effect on human development in small states. The United Nations Human Development Index (HDI) shows that since 2005, “human development growth slowed tremendously and slowed further since 2008, reaching the lowest growth rate of HDI in small states to date”.
Some small states have also relied heavily on borrowing from their domestic banks and national insurance authorities. This is a worrying problem, for should governments either not repay the debt in full or impose write-offs, there would be a negative impact on the domestic financial system, and on the domestic community.
A major difficulty that Caribbean Community (CARICOM) small states face in the international system is that since the 1990s, all of them (with the exception of Haiti) have been “graduated” to middle income status and, therefore, have very limited access to concessional borrowing. Consequently, when they have borrowed (sometimes injudiciously) they have had to rely on commercial instruments, particularly bonds, thus increasing their indebtedness and, in a few cases, making them not creditworthy. Getting debt “write-offs” is virtually impossible and even re-structuring is extremely difficult.
Apart from the Caribbean Development Bank (CDB) which is carrying significant public sector debt for Barbados and the smaller islands (and which cannot be written-off), much of the debt now owed by Caribbean small states resides in commercial debt, loans from China and credit extended under the Venezuelan Petro Caribe oil arrangements.
Commercial debt can be negotiated under the so-called “Paris Club” arrangement which offers no upfront debt reduction but could extend debt maturities. The “Club” hardly ever agrees to lower interest rates. Caribbean countries that have gone this route have achieved nothing more than an extension of the payment period.
With regard to China, its loans have been concessional and have eased severe problems for many Caribbean small states. The region received a US$530 million economic assistance package over a three-year period ending in 2010, the main benefits of which were highly concessional terms.
Additionally, the aid packages are sizeable, in contrast to development aid from the multilateral financial institutions. But, the loans have added enormously to the debt of small states. Additionally, while some governments may be hopeful of it, there is no indication that China will write-off loans or be benevolent in the event of a payment default; nor is there any indication of the terms that would be demanded to restructure debt. A further concern is that the debt is swelling because it is denominated in Yuans the value of which is rising against the US dollar to which many Caribbean currencies are pegged.
On the Petro Caribe Fund, while this has helped to cushion current account balances from oil, the loans have grown enormously. These loans too have to be repaid and while Venezuela has been generous so far, its own financial constraints suggest that there will be no write-off of these debts.
A huge problem faced by all Caribbean small states (including those of greater size) is the lack of capacity to negotiate effectively with bigger countries and agencies. Too often political decisions are taken without adequate technical preparation and experience. And, not even a group of these small countries has chosen to band together to negotiate collectively. Consequently, the outcomes are disadvantageous.
The Commonwealth Secretariat cannot encourage debt management in member countries that do not seek it, but with the agreement of governments it can provide help to those who request it. It has provided experts to help restructure commercial debts for some countries, and recently its Economic Affairs Division has done expert technical work to put the issue of small states debt before the G20 and International Financial Institutions (IFIs).
The options proposed by the Secretariat to the G20 and the IFIs, in an effort to stimulate ideas for remedying small states’ challenges, include: debt for climate change swaps as a way of resolving debt burdens while simultaneously fast-starting financing for climate change; adding a vulnerability consideration to the criteria for determining eligibility for concessional financing; and replacing adjustment programmes with resilience building as the main conditionality for lending to small states.
So far, there has not been much traction on these initiatives, and in the current international economic climate, there is unlikely to be such traction unless there is significant fiscal adjustment by governments to improve their finances and reduce debt while stimulating stronger economic growth. However, achieving a balance between austerity and growth is a major challenge for the governments of small states requiring innovative policies and prudent management that have so far thwarted many of them.
Meanwhile, heavy debt encumbers many Caribbean countries and impairs their development.
(Sir Ronald Sanders is a Consultant, Senior Research Fellow at London University and former Caribbean diplomat)