The Economic Survey of the Caribbean Part II

Unlike the Latin American region, economic performance in the Caribbean recorded an increase in economic growth from 1.3 percent in 2013 to 2.3 percent in 2014. This was driven mainly by the rebound in performance of the Tourists economies in the region which tended to offset the impact of softer commodity prices on growth among commodity producing economies.

Nevertheless, growth was not as job-creating as the rate of unemployment fell only marginally to 15.9 percent in 2014, from 16.2 percent in 2013.

This was to be expected since it takes just around three percent or more of economic growth to stimulate one percent of employment.

Of concern to the region is the high youth unemployment which averaged 25 percent. Inflation increased from 1.4 percent to two percent, reflecting both higher domestic demand and non-fuel commodity prices, in this case exceeding the benefits of lower fuel prices to oil importing countries.

ECLAC reported that the fiscal position improved in 2014 as the deficit declined influenced by a major fiscal consolidation effort in the service- based economies, which was aimed at reducing their unsustainable debt burden.

However, the deficit increased marginally in the goods-based economies amidst the pickup in activity.

Public debt contracted somewhat, from 72 percent of GDP in 2013 to 70.7 percent on average in 2014. Most economies had debt levels over 70 percent with the exception of a few including Guyana, Suriname and Trinidad and Tobago. This weighs on both investment and growth.

The lack of fiscal space constrains public investment.

Monetary developments in the region for 2014 were marked by weak private credit demand, associated with sluggish private investment. There was a spike in credit to the public sector, but there are concerns about the efficiency of the related public investment.

Moreover, non-performing loans which had increased owing to the crisis has continued to trend downwards.

The external current account deficit got smaller, contracting from 14.8 percent of GDP to 14 percent of GDP in 2014, reflecting higher tourism receipts and the benefit of lower fuel prices for most economies, except Trinidad and Tobago. Nevertheless, foreign direct investment - a crucial source of investment and technical know-how - contracted from 8.4 percent of GDP to 7.6 percent of GDP.

The regional economy is projected to slow marginally in 2015 with growth of 2.1 percent.

Growth in the service producers will be driven by continued recovery in tourism, while goods-producers will benefit from an expected firming of oil prices. The fiscal position is expected to be influenced by further consolidation to bring down debt levels, while the current account deficit is expected to widen owing to reduced exports.

Despite the welcome recovery in the Caribbean, underlying structural constraints remain that could hinder growth and poverty reduction. A key challenge remains, the decline in investment during the period after the global crisis.

Domestic investment has fallen from 28 percent of GDP before to 23 percent of GDP after the crisis in the service producers and remained stagnant at around 22 percent of GDP in the goods producers of the Caribbean.

This is an important cause for concern given the critical role investment plays in driving growth and development.

An important constraint has been the weakness of private investment. Careful analysis is required to arrive at the incentive and institutional reforms that are needed to motivate entrepreneurs to invest in new productive activity.

Against the backdrop of the financial constraint facing a number of businesses and the wider impact of high levels of debt faced by the region, ECLAC has proposed a debt relief strategy to help Caribbean small island developing states (SIDS).

The strategy is centered on multilateral institutions writing off debt owed to them by Caribbean SIDS and using the debt service payments to create a Caribbean Resilience Fund. It is proposed that the Fund be managed by a reputable institution such as the Caribbean Development Bank and be used to finance projects aimed at growing the economy, reducing poverty and protecting the environment.

The proposed fund is designed to provide finance for rehabilitation and reconstruction after disasters such as hurricanes and floods.

A counterpart fundthe Macroeconomic and Stabilisation Fund - would be used to provide countercyclical finance to address economic shocks such as terms of trade shocks.

Debt relief is necessary, as the fiscal adjustment to achieve sustainability by the region would be very large and costly in terms of growth and reduced social protection.

In addition much of the growth in debt stemmed from exogenous shocks, rather than fiscal imprudence.

Additionally, the region has limited access to concessional finance from the international community.

Finding a solution to the debt problem will go a long way to create the fiscal space to allow the region to have increased domestic resources, would help the region finance its sustainable development and secure sustainable growth