Just as the Caribbean was emerging from the debt crisis…


Just as the Caribbean was emerging from the debt crisis…

Sunday, May 24, 2020

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BEFORE the COVID-19 pandemic the small, middle-income developing economies of the Caribbean had been slowly but steadily emerging from their prolonged debt crisis. Now, thanks to COVID-19, their existing debt situation will worsen dramatically.

Reduced tax revenue and foreign exchange earnings, plus increased expenditure on public health and on the alleviation of poverty and unemployment triggered by the pandemic will create a serious fiscal problem. That, plus the inevitable drawing down of international reserves will require more borrowing in the short term.

No doubt, this debt crisis will require a special initiative for relief. This is because the debt is too small to threaten the viability of the global financial system and the terms for restructuring the debt by private lenders are not any more lenient as banks cannot afford concessions that even larger borrowers might ask for.

Because Caribbean countries are middle-income developing economies, that makes them ineligible for the most concessional lending facilities of the multilateral development banks such as the World Bank and Inter-American Development Bank (IDB).

The International Monetary Fund (IMF) money will come with tough conditionalities, apart from some limited amounts for immediate relief. Jamaica has already drawn down US$520 million. The conditionalities have not yet been spelt out.

The IMF, World Bank and IDB do not reschedule debts owed to them. The IMF has provided grants as debt relief to the poorest 25 countries. Notably, the only Caribbean country which qualified was Haiti.

Caricom countries have made a pitch on more than one occasion for a Marshall Plan for the Caribbean. This has not elicited any sympathy in the developed countries, given the burgeoning needs of the least developed countries and the poorest, who will be even worse off after the COVID-19 pandemic.

Caricom needs to craft a diplomatic demarche calling for a debt relief initiative for small and middle-income developing countries as a special genre of emerging market economy. Such a plan would have to have the following features:

(a) A commitment that it is a one-time, grade bargain;

(b) It must be comprehensive, encompassing all types of debt and all types of creditors;

(c) It must be a programme of structural transformation that can support sustainable economic growth based on high-value human resource services, eg tourism, financial services, health care, higher education; and

(d) The monetary and fiscal policies will have to be supervised by the IMF to assure the creditors.

This plan, to be successful, must not involve the Caribbean only, because some of its governments are seen as incapable of being fiscally disciplined. One big advantage is that the package involves a relatively small amount of money.

To give it the best chance of success the campaign will have to be led by a highly skilled and experienced negotiator who combines the necessary economic and diplomatic skills, backed by a world-class team of economists and financial analysts.

The lead negotiator has to be Caribbean, but the rest of the team do not have to be. Time is of the essence, as other regions may be of similar contemplation at a time of great need.

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