(CMC) A senior official of the International Monetary Fund (IMF) said Wednesday that the current global financial environment with low interest rates provides a window of opportunity for Caribbean countries to pursue adjustment, undertake liability management to lower financing costs, and reduce debts to safer levels.
But Tao Zhang, IMF deputy managing director, told the one-day 2016 High Level Caribbean Forum that fiscal and broader macroeconomic stability are necessary, but not sufficient, conditions for growth. He said additional country-specific 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 Forums speaks mainly to the complexity of these problems. Their solution will require a sustained policy effort,” Zhang told the Forum being held under the theme “Shifting Tides: Challenges and Opportunities”.
The Forum is being attended by several Caribbean Community (Caricom) leaders including Jamaica’s Prime Minister Andrew Holness, his Antigua and Barbuda counterpart, Gaston Browne, St Lucia’s Prime Minister Allen Chastanet, as well as central bank governors from the region.
In his address, Zhang told the delegates that the global outlook continues to be shaped by a subdued recovery from the global financial crisis and weak trade and that 2016 is proving to be another year of lacklustre growth.
He said in the World Economic Outlook released early October, the IMF had projected global growth at 3.1 per cent this year, with risks weighted to the downside.
He said the trend decline since 2011 in commodity prices appears to have bottomed out and “going forward, however, we expect these prices to remain at low levels and volatile”.
“This is a much different situation than when we were here four years ago,” he said, adding also that the United States recovery has been softer than previously expected, although there has been a further uptick in activity, more recently.
“Meanwhile, uncertainty has risen in Europe as countries there move to overcome the difficulties of economic recovery and managing the process of Brexit,” he said, noting that global financial conditions have eased and global financial regulations tightened.
“In particular, interest rates in advanced economies are expected to remain low. At the same time, efforts to strengthen measures of anti-money laundering and countering financing of terrorism (AML/CFT) have intensified.”
Zhang said that these shifting global trends have implications for the Caribbean, pointing out that on the downside, oil-exporting countries like Suriname and Trinidad and Tobago have been hit hard.
“Trinidad’s economy is under pressure despite some savings during the good times. This makes the task even harder for the government to rebalance policies in response to the low energy prices—particularly the fiscal stance.
“On the positive side, low oil prices have benefited most other countries in the region because they import oil and fuel. Many of these countries have seen their external positions improve significantly. For example, Jamaica has eliminated much of its double-digit current account deficit in just a couple of years. And Guyana is experiencing its first external surplus in decades.”
But the IMF official said that 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.
Zhang said that slower recovery in the US and European economies 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. 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. That said, recent data showing higher-than-expected third quarter growth rates in both the UK and the US could provide room for optimism.”
The IMF official said that on the financial and monetary side, there is perhaps a silver lining in that slower growth has delayed the normalisation of monetary policy in the advanced economies.
“This has enabled continued easy financial conditions for the rest of the world. Low world interest rates help reduce the debt servicing costs for Caribbean countries struggling with high debt,” he said, adding that “globally interconnected markets, which have benefited the Caribbean, pose new challenges as global regulations tighten.
On the issue of correspondent banking and de-risking, Zhang said these withdrawals reflect primarily the judgment of global banks about the costs and benefits of operating in developing countries in Asia, Africa, Middle East, and of course, in the Caribbean region.
He said this is partly in response to well-intended international efforts aimed at eliminating money laundering and terrorist financing.