Ongoing challenges notwithstanding, macroeconomic indicators across the Caribbean are improving. The discussion on growth points to a number of positive and negative trends. Welcome developments include improved performance in major export markets, reduced oil prices and low inflation, all of which are giving rise to positive growth. Regional growth rates which were estimated at 1.8 per cent in 2014 are projected to be 2.2 per cent in 2015. Less welcome trends indicate that, given the fall in commodity prices, primary commodity producers in the Caribbean may likely face a period of difficulty marked by lower foreign exchange earnings, lower government revenues, reduced fiscal space and higher unemployment.
While increased demand in major export markets will improve the subregions’s trade balance, particularly in tourism markets, a number of ongoing challenges to growth will persist. The reality is that tourism services are relatively expensive in the Caribbean, and as a result the region has begun to lose market share in this highly competitive sector. In addition, falling labour productivity and rising unit costs continue to limit the export competitiveness of the subregion across most sectors. It is also recognised that low growth occasions higher unemployment especially among the youth. While some governments have responded with “make work” programmes, these are not sustainable. A number of recommendations are made to enhance growth. Among these is the need to improve the business environment and to introduce labour market reforms that not only protect workers’ rights but also improve worker productivity.
As regards fiscal policy, debt levels remain high, having risen slightly for both goods and service based economies in the wake of the global crisis. Furthermore, while the fiscal deficit has declined for the goods producers it has increased for service producers. This was due to high pre-crisis commodity prices on the one hand, and low tourism receipts on the other. While the debt may have stabilised, it was still high at 71 per cent pre crisis and 69.5 per cent post crisis. Given the evidence that debt levels in excess of 60 percent tend to squeeze growth , Caribbean debt ratios continue to be clearly in an unacceptable range.
The external debt, which was 63 per cent of total debt, absorbed 11 per cent of exports of goods and services over the period 2009-2013, and some 23 per cent of government revenue. In response, governments have been scaling back on public capital expenditure and are constrained to expand social security programs. With respect to the balance of payments, there is evidenced need for short term adjustment as the deficit on the current account is large and there is much reliance on Foreign Direct Investment and remittances to close the gap. While the latter has been relatively stable, the former has been volatile and could be a challenge if a high share of profits is repatriated out of the region. In addition, anticipated benefits have not occurred, such as technology transfer to local firms and the increased complementary with the domestic private sector.
Despite declining interest rates, domestic credit to the private sector has contracted from 66.7 per cent of GDP in 2010 to 60.4 per cent of GDP in 2014. The much needed private investment in productive activity has thus been limited. There was a slight pickup in inflation in 2014, but this movement will not pose a threat to stability. Similarly, exchange rates remain broadly stable.
In summary, despite the slight improvement in macroeconomic performance across the subregion, a number of challenges must still be addressed if we are to promote successfully the sustainable economic development of the Caribbean. Of note, given the openness of the economies of the subregion, is the suggestion that public policy will need to focus on improving the environment for innovation and export business. The improvement in the Doing Business Index in some countries in recent years is a step in the right direction but much more will need to be done to remove logistical and other barriers to trade and to facilitate cooperation among firms in the subregion.
Foreign direct investment is also an important source of financing for the subregion and policies which encourage the reinvestment of profits will help sustain growth. In addition, it is suggested that opportunities for public private partnerships must be explored to help reduce private risks while generating additional resources for a fiscally constrained public sector.