IMF programmes in the Caribbean have, to put it kindly, a patchy record of success. So when in February the people of Jamaica voted out the government that had enjoyed unprecedented success sticking to the terms of an IMF programme, you could forgive some fearing the worse.
Jamaica had become something of a poster child for the IMF in the region, which helped the single-B emerging market country reduce its debt costs sharply in 2015. But for the population, wage freezes and high unemployment were hard. And the opposition Jamaican Labour Party (JLP) came into power promising an increase in both the minimum wage and the income tax threshold.
Yet perhaps the greatest testament to the previous administration’s work with the IMF is that the programme looks set to outlive the government, with economists that Emerging Markets spoke to unanimously optimistic about its prospects.
“The previous government got the buy-in from the unions and there is a pretty broad understanding that something needed to be done,” says Charles Seville, senior director at Fitch Ratings, which upgraded Jamaica to B days before the elections. “I don’t think the new government will do anything to jeopardise IMF support and that was our assumption when we upgraded Jamaica.”
Marla Dukharan, group economist for RBC’s Caribbean operations, admits that the new government’s pre-election promises caused anxiety given how previous IMF programmes had ended. But she is “quietly confident” that the election should not affect the programme. “Since the election, the JLP’s rhetoric has softened as the new prime minister may have realised that perhaps some of the anti-austerity measures he promised cannot be fulfilled under the IMF programme,” she says.
Dukharan credits the previous government with showing “tremendous political will” in not just implementing the IMF-led reforms but also building the necessary institutional capacity to support it. Of particular importance to the programme has been the Economic Programme Oversight Committee (EPOC), which has been charged with ensuring the correct implementation of the programme since the start.
Indeed, on March 9 new finance minister Audley Shaw met EPOC’s co-chairs, expressed appreciation for its contribution, stressed the “continued commitment” of the government and welcomed the continuation of the committee’s work. “I think these institutions will continue to operate effectively under the new government, which gives the programme a good chance of staying in place,” says Dukharan.
JAMAICA PROVIDES IMF LESSONS
Perhaps realising the drawbacks of such a severe austerity programme, the previous administration had in November agreed a reduction in the primary surplus target with the IMF. Shane Lowe, economic analyst at CIBC First Caribbean Bank in Barbados, says that this was “positive” news. “It will enable the government to increase capital spending that should create employment,” he says. “This should reduce the burden of the programme on the population.”
It was perhaps an acknowledgment that, for all the glowing praise from fixed income investors, the programme had not been perfect. “Notwithstanding [the success of the programme], perhaps the elections could teach us a lesson that the minimum level of spending the IMF imposes on social programmes needs to be raised to ensure people are adequately protected,” says Dukharan.
Moreover, the more successful Jamaica’s programme is, the better the outlook for the rest of the region.
Suriname, where a combination of the slump in gold and oil prices and a currency peg have left the country facing a balance of payments crisis, is likely to be the next Caribbean nation to start an IMF programme. The fund spent the first 11 days of February in the country to discuss financial assistance for a home-grown economic programme.
“Success in Jamaica has certainly made prospects far more encouraging for Suriname’s forthcoming IMF programme and others which will surely follow,” says Dukharan.
LONGER TERM AIMS
Suriname is not the only Caribbean nation to fall victim to lower commodity prices. Trinidad and Tobago is feeling the pinch in the form of a growing fiscal deficit and concerns about a shortage of foreign exchange for the private sector.
Yet for the majority of Caribbean countries, which are not commodity producers, lower oil prices have been a relief. Strong forecasts in the tourism industry are driving hopes of better growth in most of these nations.
Indeed, while the Caribbean Development Bank (CDB) predicts that the region’s economy will shrink 0.3% overall in 2016, if you exclude Trinidad and Tobago from the equation it expects growth of 1.7%.
Yet for both commodity producing and commodity consuming nations, starting to look beyond the short term is crucial. The CDB highlighted in its 2016 outlook that the region’s economies need to look for longer term policies to increase growth rates, which it says are insufficient to address concerns about employment, equality and poverty reduction. The bank recommends policies focused on fiscal consolidation, energy reform, transport and labour market reform among others.
In Trinidad and Tobago, for example, the recovery is about more than commodities prices rebounding, argues Lowe at CIBC. “There are serious infrastructure issues in the industry affecting production that kept growth low even when prices were high, and those problems need to be solved,” he says.
In the same way that commodity exporters cannot rely on high prices alone to drive growth, more visitors and more construction cannot be the sole drivers of growth in tourist destinations.
“The pipeline for tourism construction in the Caribbean is incredible. In places where construction has materialised, like St Kitts & Nevis, growth has been very strong,” says Melissa Marchand, Caribbean strategy adviser at research firm Global News Matters. “However, it can be a risk: when a project is announced it creates a short term trade imbalance as the materials required have to be procured.
“Islands also need to have the right transport infrastructure and be cautious to ensure they don’t end up with white elephants.”
And these countries should also not be getting complacent about the cheap oil they are enjoying. Rather, they should be looking to protect themselves against future price fluctuations by becoming more energy independent. “Every single country has a renewable energy target but there is a lot more to be done,” says Marchand. “There is a concern that the fall in oil prices will cause countries to take their foot off the accelerator.”
Barbados provides perhaps the best example of how longer term problems are negating short term gains. Despite an impressive 15% increase in visitor arrivals in 2015, the country’s GDP growth increased from 0.2% to just 0.5%.
Dukharan says she believes the “fiscal drag” is keeping growth at bay. “The central bank has been buying up government paper and financing government spending and this puts pressure on the exchange rate,” says the RBC economist. “It is not a sustainable way to manage your affairs and the early effects have been seen on growth and the level of reserves.”
For economists, looking for a sustainable way to manage affairs means the Caribbean needs new sectors to discover its potential. “Economies have to look to develop in other ways,” says Marchand. “There are opportunities in healthcare, as the Cayman Islands have shown, and there has been big investment in technology across the region. “I can get a better internet connection on any of the islands than I can in Houston.”