Fiscal adjustment difficult amid weak growth
FISCAL ADJUSTMENT – a reduction in the Government’s primary budget deficit – can be difficult to sustain amid weak economic growth, but that remains the situation today in the Caribbean despite some success stories, according to Deputy Managing Director of the International Monetary Fund (IMF), Tao Zhang.
Reducing the budget deficit can result from a reduction in government expenditures, an increase in tax revenues or both.
Zhang said there were clear accomplishments from Jamaica, Grenada, and St Kitts and Nevis, which he said have achieved important results reducing their fiscal and external vulnerabilities over the last few years, noting that Trinidad and Tobago was also pursuing the same goals.
“But the problem remains pervasive,” he said, adding that “the current global financial environment with low interest rates provides a The International Monetary Fund (IMF) building in Washington, DC. Jamaica has been pursuing a programme of fiiscal consolidation aimed at reducing government deficits and debt accumulation under an IMF programme since 2013.
window of opportunity to pursue adjustment, undertake liability management to lower financing costs, and reduce debts to safer levels.”
Speaking at an IMF forum in Trinidad last week, Zhang said that fiscal and broader macroeconomic stability are necessary, but not sufficient conditions for growth, noting that additional countryspecific structural reforms have to go hand-in-hand to reap the growth dividend.
“The incremental nature of the progress made on boosting growth, diversification, competitiveness, energy efficiency, financial sector vulnerabilities, fiscal adjustment, and other recurring themes from past Caribbean fora speaks mainly to the complexity of these problems. Their solutions will require a sustained policy effort,” he said.
Additional challenges for the region include Brexitrelated risks and further spread of the Zika virus – both of which could affect tourism, said Zhang.
Referring to the implications of the slow recovery in the United States and European economies, the IMF executive said this means the pickup in tourist arrivals in the last two years could reverse in most tourism-dependent economies in the Caribbean.
“We project the euro area to grow by only 1.7 per cent this year and 1.5 per cent in 2017,” he said. “Likewise, the United Kingdom, a major source of tourist arrivals in the Caribbean, is projected to grow by a modest one per cent next year. But there are significant risks around this projection, since the impact of Brexit remains unclear,” he added.
“That said, recent data showing higher-than-expected third-quarter growth rates in both the UK and the US could provide room for optimism.”
Another important new shift for the Caribbean is the impact of the rapprochement between the United States and Cuba, said Zhang, noting concerns that this otherwise encouraging development will cause US tourism to flow to Cuba at the expense of other Caribbean destinations.
BIG QUESTION
“The big question is how to be prepared for the opening of Cuba to improve existing Caribbean destinations and strengthen competitiveness,” he said.
Suggesting that it was important to take stock of some of the key policy responses as well, Zhang said the competitiveness challenges highlighted at the 2012 forum, including enhancing labour productivity and reducing energy costs, remain relevant today.
“That is not to say that progress has not been made, but more work is needed. Many countries have made renewable energy and reduced energy costs key parts of their growth strategies. They are implementing potentially farreaching energy reforms. Further, boosting energy efficiency, as well as improving labour productivity, remain essential for fostering competition and growth in the Caribbean,” he said.
Pointing to some shifting global trends and what they meant for Caribbean economies, Zhang said, for example, that low oil prices have benefited most countries in the region because they import oil and fuel.
“However, cheap oil today does not eliminate the need to improve the efficiency of domestic power utilities throughout the region. As highlighted in the last two Caribbean fora, there is still a need to reduce reliance on government subsidies, and to expand the use of renewable energy,” he said.
Zhang, at what is his first high-level Caribbean forum as IMF deputy managing director, committed to building on the work of the Fund’s management, “particularly my predecessor, Min Zhu, in continuing raising the profile of the Fund’s engagement with the Caribbean. I am committed to strengthening our engagement and working in cooperation.”
According to Zhang, “Whatever new challenges arise, we will work together with you to find solutions.”
The current global financial environment with low interest rates provides a window of opportunity to pursue adjustment, undertake liability management to lower financing costs, and reduce debts to safer levels.