New policies are needed to break the cycle of debt dependency
This article was originally published by SPERI
Sun, sea, sand, rum-punch, even reggae, these are the images that usually spring to mind when we think of the Caribbean islands. Less well-known is the profound sovereign debt crisis that many are currently experiencing. Indeed, for some, it has been a persistent and unresolved problem for well over a decade. While international attention focuses on the damage caused by the accumulation of debt in Europe and on the debt ceiling debacle in the United States, a silent debt crisis continues, under the radar and unabated, in the Caribbean.
Didn’t we cancel the debt? Yes and no. Many people probably remember the sensational Jubilee 2000 debt cancellation campaign which mobilised millions of citizens around the world under the simple slogan, ‘drop the debt’. Between 1996 and 2005, creditor countries did pledge to write-down more and more debt. A big prompt was probably the belated recognition that most of it was uncollectible. But there was a catch – you had to be ‘on the list’ – and, for the most part, the Caribbean was not. It certainly had sufficient debt to qualify, but was considered too wealthy (except Guyana and Haiti which did benefit).
Yet, by almost any measure, the Caribbean is one of the world’s most heavily indebted regions. The recent financial crisis only made a difficult situation worse. Debt-to-GDP in the Caribbean stood at an average of 70.3% in 2012; for the Eastern Caribbean currency union the figure was over 91% in the same year. St. Kitts and Nevis is the most severely indebted country at almost 200% of GDP, closely followed by Jamaica at almost 150% (compare this to Greece with a debt-to-GDP ratio of 160% in 2013 and Portugal at 127%).
It’s difficult to underestimate the many negative consequences that such high levels of debt are having on the region’s economies and societies. Economic growth – the most important means for debt reduction – is practically non-existent. High levels of debt crowd out both public and private sector investment in the economy and are also associated with higher borrowing costs.
Many Caribbean countries spend far more on debt service than on key social expenditures. In Jamaica, debt service has consumed nearly 50% of total budgeted expenditures over the last four fiscal years, while health and education combined have amounted to only 20%. In Grenada, a similar picture can be found: in 2013 debt service will consume about 41% of government expenditures, education and health combined just 16%. Although the region scores highly on several social indicators, the reality is that poverty and unemployment remain high. UNDP’s Caribbean Human Development Report also points to an alarming increase in crime and insecurity across many countries in the region.
What’s being done? As in Europe, fiscal austerity has been heralded as the best (indeed only) response. In several cases this has been combined with piecemeal attempts to restructure portions of the debt. But the limitations of these exercises are already plain.
The IMF itself admits that fiscal consolidation has a fairly negative track record in the region. In the extreme case, St. Lucia has undergone eight episodes of fiscal ‘consolidation’, none of which was really a success. Nor does this take into account the heavy social costs associated with extreme expenditure cuts.
So far, debt restructurings have done little to restore long-term debt sustainability to most Caribbean countries (Suriname and Trinidad are the notable exceptions, both of them commodities exporters). Most restructurings have dealt with a limited portion of the debt in isolation, rather than restructure the whole lot in one go. Some, like Jamaica’s 2010 debt exchange, simply extended maturities and lowered interest rates; a case of ‘kicking the can’ further down the road. Unsurprisingly, Jamaica restructured again last year. Belize, Grenada and St. Kitts and Nevis have all been casualties over the last 18 months. Indeed, I can count an incredible 37 debt restructurings across 12 Caribbean countries since 1990! That’s more than one per year. Something clearly isn’t working.
Continuously restructuring limited portions of the debt, combined with austerity, is akin to watching the same bad movie over and over again. Is this genuinely the only response available to the region’s protracted debt crisis? In an open letter to the Guardian, Grenada’s Minister for Economic Development, Oliver Joseph, recently called on the international community to support upfront, comprehensive, debt cancellation for Grenada from ALL its creditors as the only viable way to kick-start its economy and secure long-term debt sustainability.
There is, unquestionably, a need to improve governance in many countries and, in particular, to improve tax collection, especially from wealthier segments of the population. More transparency in, and accountability for, borrowing decisions is also needed. Comprehensive debt cancellation is therefore a necessary, but not sufficient, condition to restore debt sustainability.
Consensus is emerging on the need to reduce Caribbean debt to more sustainable levels. Through a series of Working Papers (see here and here), the IMF has argued that debt reduction is crucial and has even suggested that debt levels higher than 56% of GDP in the region act as a severe drag on economic growth. The Commonwealth Secretariat has called for a ‘Heavily Indebted Middle-Income Countries’ Initiative, as well as debt for climate change adaptation swaps for small vulnerable economies. The UN has also argued that debt is unsustainable in the Caribbean and should be dealt with through some form of ‘international bankruptcy’ procedure. So how much more time must be wasted?
Looking forward, the international community needs to re-evaluate its support measures for small climate-vulnerable economies. Currently, most countries rely heavily on private sources of finance to fund development and meet fiscal deficits. The Caribbean receives very little aid or climate finance. However, the dynamics associated with private sources of finance are very different to those associated with public lenders. These funds are typically more expensive, volatile and short-term in nature.
We need to ask whether this financing model is really suitable for a region that is disproportionately exposed to external shocks, such as extreme weather events and exported recessions from advanced economies.