ECLAC regional review for 2015 Mixed signals from Caribbean economies

The Caribbean as a whole over the 2015 period saw a slowdown in the preliminary estimate of economic growth from 2.6 percent in 2014 to 1.6 percent in 2015. Generally, growth among countries that are service providers outstrip that of the commodity producers. Growth rates range from just over 5 percent for St Kitts and Nevis to just under -3 percent for Dominica. Only Dominica is estimated to have negative growth, with Trinidad and Tobago expected to have growth of about 0.2 percent.

Given the importance of Government expenditure in the economic life of these countries, all but two of them – Antigua and St Kitts and Nevis - had fiscal deficits. Not only did the majority of countries have deficits, but average deficits increased from 2.6 percent to 2.8 percent. The fall in global commodity prices has seen some commodity producers attempt adjustment, with capital expenditure facing the brunt of this adjustment. Additionally, the fiscal challenge encountered by commodity producers in the region was compounded by the higher wage bill they had to deal with.

The fall in commodity prices, among other effects, would have lowered revenues accruing to various governments from taxes on those commodities. This would have limited the fiscal space available to these governments. Such a situation may have contributed to the very small reduction in overall debt from 77 to 76 percent in 2015. It is interesting to note that in 2015, debt in Trinidad and Tobago expanded by 6 percent.

Data up to July 2015 appear to show inflation in the region well contained below one percent. Admittedly there was a slight uptick between May and July this year. Since July of 2014, oil prices have trended downward from well over US$100 per barrel. This has resulted in a downward trend in inflation which saw a significant slowdown in the inflation rate between November 2014 and March 2015.

The region’s current account balances improved with a slight narrowing of the deficit to 10.7 percent from 11.6 percent. This improvement was largely due to improvements recorded among the service producers. Once again the declining commodity prices affected yet another feature of economic life, so much so that Suriname saw its current account deficit widen by 5.4 percentage points and Trinidad and Tobago experienced narrowing of its current account surplus by 4.6 percentage points.

Against the backdrop of the broad performance indicators outlined above, one would have expected the monetary response in all the Caribbean countries to be accommodative. This is exactly what the Eastern Caribbean Currency Board (ECCB) and Jamaica did. They reduced their policy rates. In the case of the Bahamas and Belize, other factors such as pressure on the exchange rate had a deciding influence on the policy decision. However, Trinidad and Tobago increased their repo rate while Suriname increased the reserve requirement. The latter could be considered to be consistent with a previous policy decision to devalue the currency to address the severe fall in foreign exchange reserves.

The response of Trinidad and Tobago is very curious. The seven consecutive increases in the policy rate was part of the forward guidance by the Central Bank of Trinidad and Tobago in its attempts to influence the financial decisions of households, businesses and investors by letting them know what to expect from interest rates. One can only surmise that this policy response was because the Bank considered the threat of portfolio adjustments to foreign destinations, which was triggered by the fear of the adjustment of the FED fund rate, to be more serious than the threat to the economy of higher interest rates. However, given the present economic performance one wonders what was the contribution of monetary policy to the slowdown in economic activity in the country.

There are a number of factors and challenges that have contributed to the present economic performance. These include declining competiveness, the fall in commodity prices and natural disasters that destroy the infrastructure and economic assets on the islands and take huge resources for reconstruction and recovery.

Finally, the increasing inequality, coupled with low growth is a big challenge for the region. It is vital that gaps found in education and training, nutrition and health deficiencies and lack of access to new efficient technologies needs to be addressed urgently.

What does the region need to do going into 2016? Certainly high on the agenda is to get the international community to agree to provide debt relief to middle income countries for which the Caribbean is in dire need of help. There is need for structural transformation through investment transport infrastructure (air and sea), renewable energy (looking carefully at the per unit use of energy) and bringing the Caribbean closer to the standards and operational infrastructure that exist internationally for information and communications technology. The ball is in our court to improve on 2015’s performance