A Wall Street investment seminar I participated in on a number of regional countries this week provided an opportunity to compare the issues facing some of the countries in the region — the Dominican Republic, Costa Rica, El Salvador, Panama, The Bahamas, and even Jamaica. The Dominican Republic’s growth is estimated at a minimum of 10 per cent for this year, compared with the so far weakish recovery in many other regional countries. Part of this is the recovery from last year, particularly tourism, but September tourism numbers exceeded comparable 2019 numbers (also true for Cancun), coupled with a remarkable growth in goods exports. So the question immediately arises as to why certain regional countries seem to perform so much better than Jamaica and many other Caribbean economies. Panama is another typically strong performer, although there the positive influence of the Canal and trade is clear. On the negative side they have a serious “gray” list issue, with the danger of going on the two major global “black lists” on taxation and money laundering — issues which also affect some other Caribbean Islands.

The role of the International Monetary Fund (IMF) is also clear across the region, with Costa Rica having reached an IMF agreement in February, but facing the difficult task of raising revenue sustainably through tax reform, while El Salvador, under its populist president, doesn’t seem to want an IMF agreement despite a worsening economic situation.

In this regard, The Bahamas is perhaps the most interesting current regional bond market conversation, other than perhaps Belize’s “blue bond” coming next month, assuming its debt for nature swap goes through. The key question here is whether the new prime minister of The Bahamas, Philip “Brave” Davis, can keep his promise to reduce Value Added Tax (VAT), their equivalent of our GCT, from 12 to 10 per cent, having just been downgraded by the Moody’s rating agency the day after his victory. The former government party has estimated the annual loss of revenue from keeping this promise at about $160 million per year, which seems roughly right. It turns out that a brief review of the numbers suggests this should be possible, but would require other unpopular measures e.g. raising already high customs duties, to be revenue neutral. The correct approach for The Bahamas should therefore be, as Jamaica has done several times, to set up a public private working group on tax reform as soon as possible to look at the best way of raising revenue, as The Bahamas urgently needs to reduce, not increase its large fiscal deficit. The political risk of such an approach is that the recommendation ultimately turns out to be that VAT is the most efficient way of raising revenue there. Like Jamaica, there is also an argument that revenue losses are probably very significant for this tax type, so better enforcement could make a difference.

Looking briefly at Jamaica, one question from the assembled Wall Streeters was whether the Bank of Jamaica was right to raise interest rates, and should it continue to do so. Clearly, the Bank of Jamaica had anticipated the latest inflation print of 8.2 per cent, well outside their band, which also makes the real interest rate severely negative, even after the recent rise.

The first thing to note is that cost push inflation is rising globally, almost everywhere, a result of disrupted transportation and supply chains, labour shortages and an energy squeeze. However, in the US and UK particularly, there has been extremely buoyant demand for goods as people have shifted from buying services with their forced pandemic savings. Government largesse, in the form of extended unemployment and other cash grants, combined with people re-thinking their lives during lock down, may have also reduced the supply of labour in some areas for the time being.

This is not true of Jamaica, with the possible exception of the construction industry, although concerns are now emerging even there. Jamaica is still well below pre-pandemic output and employment levels, and likely has a shortage of effective demand overall. The other reason for squeezing demand here is often an unsustainable current account deficit, but the deficit is currently very subdued and sustainable, with the caveat that one needs to watch oil prices.

All this suggests that even if the US and UK are behind the curve in responding to inflation that can no longer be deemed transitory, as suggested by some commentators like Mohamed El — Erian of Cambridge University, this does not mean that a currently high credibility country (in terms of our economic policy and transparency) like Jamaica needs to follow some of its less credible emerging market peers. The cost benefit ratio of a strong interest rate response here still seems skewed, as the relatively small impact we may be able have on the local piece of our inflation by suppressing effective demand, would be far outweighed by the cost to still depressed output and employment.