Fis­cal ad­just­ment dif­fi­cult amid weak growth

Jamaica Gleaner - - BUSINESS - McPherse Thomp­son As­sis­tant Edi­tor - Busi­ness mcpherse.thomp­son@glean­erjm.com

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.

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