As the Cayman economy struggled in the aftermath of the financial crisis, the UK decided to intervene in its struggling overseas territory, demanding the islands increased revenues and cut back expenses.
The “Framework for Fiscal Responsibility”, agreed in 2011 and signed into law in late 2012, required Cayman to gain UK government approval for its annual budget before it could be debated back home.
When Marco Archer became finance minister in mid-2013, he had three years to comply with the framework, which included meeting targets for cash reserves, net debt and debt service.
The progress Cayman has made under Archer meant it easily complied by the deadline of June 30 this year. As a result, the islands were granted so-called “budgetary freedom”, meaning they no longer have to send the budget to the UK for approval.
RBC’s Caribbean economist, Marla Dukharan, says this achievement makes Archer the “most impressive finance minister in the Caribbean”.
The cash reserve ratio is well above the 90 days coverage target, the island is heading towards zero borrowing, and growth has increased from 2% to 2.4% at the start of this year while expenditure and debt are down.
“It is a particularly significant achievement in the Caribbean, as looking across the region gives me a sense that for most countries — except those on an IMF programme — fiscal discipline is not a priority,” says Dukharan.
So-called budgetary freedom provides Cayman Islands with administrative freedom, says finance minister Marco Archer, as it increases the speed and decisiveness with which the government can act. But the significance of achieving budgetary freedom is not just practical.
“There is a tremendous amount of national pride tied up in being able to manage our financial affairs effectively,” the minister tells GlobalMarkets.
“Budgetary freedom is the confirmation to the world that our fiscal management is sound.”
Of course, this message also brings tangible benefits. Archer says it adds to already growing investor confidence, which can create growth, investment and opportunities for the islanders.
But as much of the Caribbean suffocates under high debt burdens, what was Cayman’s secret?
“We understood that the best way to reduce debt was to grow the economy,” says Archer. “Taxing your way out of debt is not necessarily the best option; rather with economic growth comes increased revenues and an ability to pay down your debt.”
There was also a no new borrowing policy, consistent paying of debt maturities, a renegotiation of existing debt that led to $6m in interest savings, tax incentives to stimulate investment, and a decrease in import duties to increase consumption.