Uncertain external economic outlook for Caribbean

Tuesday, December 29, 2015

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Developing
countries, including those in the Caribbean, will face an uncertain global economic situation in 2016, based on the weakening of the global economy during this year.



A new study by the International Monetary Fund (IMF) has identified the critical explanatory factor as being the substantial decline in commodity prices during the past 18 months. A very important development which has had both negative and positive implications has been the drop in the price of oil.



Oil-importing economies have benefited from lower import bills but oil-exporting countries have been adversely affected. Commodity-dependent exporting countries, many of which are least developed countries, have also suffered from the declines in commodity demand and prices. Only the more diversified economies have continued to experience robust growth.



The Caribbean economies affected by relatively low prices for commodity exports will be Trinidad and Tobago, Belize, Guyana and Suriname. The coming slow-down in Trinidad and Tobago, already classified as in depression, will have repercussions for the rest of the region.



Those Caribbean countries that rely on tourism should benefit from lower oil prices and will continue to gain from the economic recovery in the United States. The pending growth of tourist arrivals from the US will not impact the region this year, even though regular commercial flights from the US to Cuba will be a reality in 2016.



The recent but long-expected hike in the rate of interest by the Federal Reserve may have some impact on government debt-servicing and the cost of external borrowing in the forthcoming fiscal year. Countries that depend on access to external funding need to place a high premium on tight fiscal policy, especially public debt management.



While the fall in oil prices is comforting, what really matters in the short term is what will happen with PetroCaribe. Given the recent changes in the political configuration in Venezuela. no one can predict the future with any certainty.



It seems reasonable to assume that Venezuela will always, as the past has demonstrated, need allies in the Caribbean, but the dire economic circumstances in Venezuela may force a change in the terms of PetroCaribe.



Fortunately, although there has been a slowing in the rate of growth in China and some internal problems need to be addressed urgently, China will continue to finance infrastructure projects executed by Chinese enterprises. The needs of the Caribbean are so small that this source of external development financing can be counted on to continue. There is also the prospect of foreign direct investment (FDI) from China which is now the second largest source of FDI.



In 2016, Caribbean Governments will have to pursue tight fiscal policy and careful public debt management while creating the conditions for increased private capital and remittance.



The private sector will need to be encouraged to be more internationally competitive, and more productive and innovative in saving and earning foreign exchange.



Civil society will have to be resourceful as the capacity of governments to finance social programmes will be constrained. Regional cooperation will be put to the test and the costs and benefits of every regional institution will have to be reviewed.

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