Fiscal Consolidation with Medium term growth in the Caribbean Mr. Dillon Alleyne Economic Affairs Officer, ECLAC Conference on the Economy Department of Economics, UWI St Augustine 7th October 2010
Outline Conceptual issues The Impact of the crisis The fiscal and balance of payments situation - Current account and fiscal balances - Trade in goods and services - The capital and financial account Growth prospects for 2010 The way forward
Conceptual Issues Two perspectives on the expanding CA of the BOP and fiscal balance. Static Mundell-Fleming (1962,1963) approach: budget deficits causes the current account deficit Ricardian Equivalence (1974,1989): relationship between the budget deficit and current account is weak The hypothesis suggested is that causation runs from the current account to the fiscal deficit Reorientation of trade rules under the WTO from the 1980 s which removed trade preferences made many activities uncompetitive. Lower FDI and other foreign exchange inflows, plus weak private sector response forced govt. to act In examining the cost of the crisis, the Caribbean was unprepared relative to economies in LA.
Table 1: Consolidated Impact of the Global Recession in 2009 on the Economies of the Caribbean Real GDP (percent) Tax Revenue (percent GDP) Foreign Exchange Receipts (percent GDP) Summary Impact (percent GDP) Antigua and Barbuda -7.3-4 -15.4-26.7 Bahamas -5.1-1.2-7.8-14 Barbados -4.6-2.4-2 -9.1 Belize -3.4 0-10.3-13.7 Dominica -0.3 0.2-4 -4.1 Grenada -7.9-2.9-8.9-19.7 Guyana 2.1 0.8-4.5-1.6 Jamaica -3.4 0.5-5.9-8.8 St. Kitts & Nevis -6.2-3.7-6 -15.9 St. Lucia -5.9-0.1-4 -10 St. Vincent & the Grenadines -3.2-1.3-5.5-10 Suriname 0.7 0-8.7-8 Trinidad & Tobago -3.5 0-23.4-26.9 Caribbean b -3.7-1.3-8.2-13.2 Trend generated using the Hodrick- Prescott filter
Impact..cont d Observations With respect to GDP, the losses were greater for service producers relative to primary commodity producers and manufacturers. Most of the losses came through the foreign exchange route (FDI, remittances and export earnings) Responses Fiscal stimuli within the context of limited fiscal space (Bahamas, Barbados and Jamaica) External financing from the IMF and the IDB Eight Point Stabilization and Growth Programme in the ECCU. The only sub-regional approach to the crisis in the Caribbean.
Current account and fiscal problems In light of limited fiscal space, high debt and growing CA balances policy makers see the crisis as a short run problem of fiscal excess. The response has been attempts to improve revenue collection, lower expenditure mostly through the capital budget, and impose fiscal rules to address the problem. It is suggested that the origin of the problem lies in the deterioration of the CA balance of a number of countries with the exception of Trinidad and Tobago and Guyana until recently.
8 Current account balance,1995-2009 (% of GDP) 6 4 2 Percent GDP 0-2 -4 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009-6 -8-10 -12 Caribbean Caribbean excluding T&T Source: ECLAC based on official data
8.0 6.0 4.0 2.0 Primary and Overall Balance as % of GDP,and the Current Account Deficit for the Caribbean with and Without Trinidad and Tobago f G D P % o 0.0-2.0-4.0 2002 2003 2004 2005 2006 2007 2008 2009-6.0-8.0-10.0-12.0 Source: ECLAC based on official data Caribbean PB Caribbean OB Caribbean Carib exc. T&T PB Carib exc. T&T OB Carib exc. T&T
Causality and other evidence The preliminary results from Granger causality tests showed that the CA deficit Granger-caused the OB deficit and not vice versa. This makes counter-cyclical fiscal policy difficult. Other evidence Domestic Investment as a share of GFCF decline after 2005.S. Roache(2006) showed that PDI declined between 1988-2004. The fiscal stance was consistently in excess of the export performance ratio. Real public expenditure was either constant or trending up in the Caribbean.
Average Domestic Investment, and FDI as a share of GFCF for the Caribbean and Trinidad and Tobago 2000-2008 100 90 80 Perc centage 70 60 50 40 A 30 20 10 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 Av FDI Av Dinv Av FDI T and T Av Dinv T and T Source: ECLAC based on official data
Total public debt to GDP ratio and the % share of external and internal debt in 2009 Public Debt, % of GDP 2009. Trinidad and Tobago Suriname Saint Vincent and the Grenadines Saint Lucia Saint Kitts and Nevis Jamaica Guyana* Total Domestic Grenada External Dominica Belize Barbados Bahamas Antigua and Barbuda Source: ECLAC based on official data 0 20 40 60 80 100 120 140 160 180 200 % GDP
20000 Consequence of trade liberalization has been the weak response of the trade sector Merchandise Trade Deficit, 2002-2009 (with and without Trinidad and Tobago) 15000 Im ports (US$m E xports and 18000 16000 14000 12000 10000 8000 6000 4000 2000 10000 5000 0-5000 -10000 Trade Bala ance (US$m ) 0 2002 2003 2004 2005 2006 2007 2008 2009 Exports (excl T&T), L axis Imports (excl T&T), L axis C/bean Trade Deficit (excl T&T), R axis T&T Surplus, R axis -15000 Source: ECLAC based on official data
Goods and services balance for Trinidad and Tobago, Guyana and the rest of the Caribbean 2002-2009 Goods & Service balance, % of GDP 60 40 20 %GDP 0 2002 2003 2004 2005 2006 2007 2008 2009-20 -40-60 Rest of Caribbean Goods & Service Balance, % of GDP TT goods & service balance, % of GDP Guyana goods & service balance, % of GDP Source: ECLAC based on official data
Trade patterns and evolutions Regional goods exports have become increasingly dominated by Trinidad and Tobago as its share of exports rose from 37.4% in 1990 to 70.5% in 2008 The OECS has lost GDP share in the region and export share of goods and services have declined over this period. There is an increasing concentration of exports on a few goods and services. The service sector has begun to lose global market share.
1.8 1.6 1.4 1.2 The search for new growth engines and the rejuvenation of a maturing service sector is an important part of the restructuring necessary for medium term growth Index of Service Exports, 1980-2008 (as % of total global service exports) (Source:UNCTAD) Index 1.0 0.8 0.6 0.4 0.2 0.0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 Developing CARICOM + Dom Rep OECS+Bah+Bdos+Jam Source: ECLAC based on official data
Financing the current account is crucial and the lack of foreign exchange is a binding constraint Components of Foreign Exchange Inflows, 2002-2008 Trinidad and Tobago Suriname St. Vincent and the Grenadines St. Lucia St. Kitts and Nevis Jamaica Guyana Grenada Dominica Belize Barbados Bahamas, The Antigua and Barbuda -40% -20% 0% 20% 40% 60% 80% 100% FDI Inflows Net Current Transfers Net Services Source: ECLAC based on official data
Capital and Financial Balance Capital & Financial Balance, % of GDP 20 15 10 5 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009-5 -10 The Caribbean (13) The Caribbean exc. T&T Source: ECLAC based on official data
Growth prospects for 2010 Prospects for 2010 are so far better than 2009 but growth is constrained by continuing problems in the US economy and the EU. Growth in the MDCs is anticipated to be 1.6% with positive growth projected for Guyana (4.4%), Suriname (2.5%), Trinidad and Tobago (2.0%) and Belize (1.5%) The overall projection for the ECCU was a decline of 1.8% as a number of countries were expected to face continuing negative growth
The way forward A programme of fiscal consolidation should be pursued over the medium term but this must not disrupt investment in domestic capital which is designed to raise local capability. A pure export strategy is limited. Thus boosting internal and regional demand by the encouragement of sustainable projects through private and public sector partnerships in necessary. A programme of export diversification must be pursued in addition to market diversification, to reflect the emergence of new players in international trade.
Selected References Barrow, Robert, J. 1989.The Ricardian Approach to Budget Deficits.Journal of Economic perspectives.3:37-54. Godley, W and Cripps.1983.Macroeconomics.New York.Oxford University Press. Katirecioglu, S T ; Sami Fethi and Meryem Fethi.2009. Twin deficits phenomenon in small islands: an empirical investigation by panel data analysis. Applied Economics Letters. pp.1569-1573. Economic Survey of the Caribbean 2009-2010. ECLAC, Subregional Headquarters for the Caribbean, Port of Spain. ECLAC.2005.Growth, Debt and Finance in the Caribbean.LC/Car/L.71 ECLAC.2010.Paninsal. Chapter IV. Caribbean Trade and Integration: trends and future prospects. Fleming, J.M.1963.Domestic Financial Policies under fixed and floating exchange rates.imf Staff Paper, 9:369-379. International Monetary Fund.2009.Fiscal Policy Response to the Crisis. How Much Space for Countercyclical Policy. Regional Economic Outlook Western Hemisphere, Washington.IMF. James, Vanus.2010.A Step towards a Dynamic Analysis of Development. University of technology, Jamaica. James, Vanus.2006. Import productivity Growth, Capital deepening and Caribbean development: Some Theoretical Insights. In Anthony Birchwood and Dave Seerattan Edition. Finance and Real Development in the Caribbean. Caribbean Centre for Monetary studies, The University of the West Indies, St Augustine, Trinidad and Tobago. Mundell,R.A.1963. Capital mobility and stabilization policy under fixed and flexible exchange rates. Canadian Journal of Economic and Political Science.29(4):475-485. Roache, Shaun, K.2006.Domstic Investment and the Cost of Capital in the Caribbean.IMF Working Paper.IMF.WP/06/152.