The Caribbean has a track record of high fiscal deficits, partly reflecting procyclical fiscal policies in good times. This has resulted in elevated levels of public-debt-to-GDP ratios since 1990. The predominant source of the budget imbalance is the central governments, even though public enterprises have also contributed significantly to the debt buildup. The debt accumulation stems from countercyclical fiscal policy in bad times and procyclical fiscal policy during periods of economic boom. The net result is that debt which has accumulated during periods of weak growth is not offset in good times, resulting in higher levels of debt in the medium term (Egert, 2011).
The global financial crisis severely affected the region’s countries as spillovers from the United States and Europe led to a collapse of GDP growth and soaring debt levels. Debt rose from already elevated levels, and the crisis exposed balance sheet vulnerabilities that had built up over many years. These vulnerabilities originated from a strategy of increasing public spending to counteract declining trade performance, partly due to the erosion of trade preferences, and rebuilding costs incurred after frequent natural disasters.
Prior to the onset of the global financial crisis, moderate growth rates helped some countries broadly stabilize and reduce their debt ratios, albeit at high levels. As the Caribbean countries entered the global crisis with low fiscal buffers, fiscal risks were exacerbated and materialized. This chapter sets out to assess how these countries ended up in this serious situation and what role fiscal policy played in this regard. In particular, it analyzes fiscal performance in the region over the last 15 years to determine the nature of underlying fiscal problems and the extent of the impact of the global financial crisis on fiscal outcomes. It complements that by examining whether the reaction of fiscal indicators during the crisis was different from previous downturns.
Not all Caribbean countries were affected the same way by the crisis. While tourism-dependent economies were hit hard by the deep slump and slow recovery in advanced economies, commodity exporters rebounded rapidly after the crisis, buoyed by high commodity prices. The chapter takes a look at these differences, comparing fiscal outcomes for commodity exporters and tourism-intensive countries.
Lastly, since debt ratios increased substantially during the global financial crisis, the chapter closes with an analysis of the factors that contributed to this debt accumulation.
Fiscal Performance During the Past Two Decades
This part analyzes the fiscal performance in the Caribbean over the last 15 years by dividing the period into three distinct sub-periods. The first sub-period (1997–2002) was characterized by rising debt levels, as the average debt-to-GDP ratio increased from 54 percent to 74 percent by the end of 2002. During the second sub-period (2003–07) debt declined by around 18 percentage points of GDP, while the third sub-period (2008–11) saw more debt accumulation, with the average reaching 70 percent of GDP (see Figure 2.1).1
Real GDP Growth and Government Debt, Regional Average, 1997–2011
Source: Author’s calculations.a Weighted average.Real GDP Growth and Government Debt, Regional Average, 1997–2011
Source: Author’s calculations.a Weighted average.Real GDP Growth and Government Debt, Regional Average, 1997–2011
Source: Author’s calculations.a Weighted average.The debt buildup in the first sub-period occurred in a relatively benign growth environment. We calculated averages over the three sub-periods for GDP growth and the primary balance together with the end-of-period debt stock (see Figure 2.2). The analysis shows that during the first sub-period, GDP grew at an average rate of 3.4 percent, while the primary surplus was close to 2.4 percent of GDP. In the second sub-period, the primary surplus increased by 1.7 percentage points of GDP accompanied by average growth rates of 4.3 percent. During the recent financial crisis, primary balances deteriorated to about 1.5 percent of GDP, while GDP was stagnant.
GDP Growth, Primary Balance, and Debt, Regional Average, 1997–2011
Source: Author’s calculations.a Government debt is measured as end of period, growth and primary balance represent average over period. Government debt and primary balance represent weighted Caribbean averages.GDP Growth, Primary Balance, and Debt, Regional Average, 1997–2011
Source: Author’s calculations.a Government debt is measured as end of period, growth and primary balance represent average over period. Government debt and primary balance represent weighted Caribbean averages.GDP Growth, Primary Balance, and Debt, Regional Average, 1997–2011
Source: Author’s calculations.a Government debt is measured as end of period, growth and primary balance represent average over period. Government debt and primary balance represent weighted Caribbean averages.Individual country experiences show that most countries had the highest debt buildup during the first sub-period (see Figure 2.3). Exceptions are Guyana and Trinidad and Tobago, where debt declined from 1997 to 2011. Aided by the Heavily Indebted Poor Countries Initiative (HIPC) and the Multilateral Debt Relief Initiative (MDRI), Guyana’s debt was more than halved between 1997 and 2011. Debt in Trinidad and Tobago started to increase during the financial crisis after having declined strongly in earlier years, so that in sum debt in 2011 was still lower than in 1997. Suriname’s debt fell in the second sub-period by as much as it had increased in the first and the last sub-period. Thus, overall, Suriname’s debt level in 2011 was as high as in 1997. On the other hand, in The Bahamas and Barbados debt levels rose over the entire period and increased particularly sharply during the latest sub-period.
Change in Government Debt by Country, 1997–2011
(percent of GDP)
Source: Author’s calculations.Change in Government Debt by Country, 1997–2011
(percent of GDP)
Source: Author’s calculations.Change in Government Debt by Country, 1997–2011
(percent of GDP)
Source: Author’s calculations.The behavior of cyclically adjusted primary balances varied across countries (see Figure 2.4). In about half of the countries, primary balances improved between 2003 and 2007, before deteriorating again during the financial crisis in 2008–11. In other countries, primary balances deteriorated in 2003–07 with some improvement in the last sub-period. In Belize and St. Kitts and Nevis, primary balances have continously improved. In The Bahamas and Barbados, primary balances mirror the debt behavior and have continously deteriorated. Taking this together with the debt development shows that in some countries high primary balances have contributed to falling debt levels, while in others falling debt levels were achieved despite primary deficits due to exogenous forces (e.g., Guyana getting debt relief).
Cyclically Adjusted Primary Balance by Country, 1997–2011
(percent of GDP)
Source: Author’s calculations.Cyclically Adjusted Primary Balance by Country, 1997–2011
(percent of GDP)
Source: Author’s calculations.Cyclically Adjusted Primary Balance by Country, 1997–2011
(percent of GDP)
Source: Author’s calculations.Over the years, revenue performance has improved significantly in the Caribbean, while at the same time primary spending has strongly increased. During the first five years of the sample period, revenues in percent of GDP averaged around 23 percent before increasing to around 29 percent by 2008 (see Figure 2.5). In 2009, revenues dipped briefly to 26 percent of GDP before increasing again to around 28 percent. This was due to revenue measures adopted by some countries (e.g., VAT introductions or VAT and excise rate increases). Primary spending hovered around 21 percent of GDP until 2005 before it started to increase strongly to above 26 percent of GDP in 2011. Real primary expenditure and revenue growth have tended to move together (see Figure 2.6) except during the growth slowdown in 2001–02 and the 2008–09 recession. In both cases, expenditures grew strongly, while revenue growth was subdued.
Primary Expenditure and Revenues, Regional Average, 1997–2011
(percentage change)
Source: Author’s calculations.Primary Expenditure and Revenues, Regional Average, 1997–2011
(percentage change)
Source: Author’s calculations.Primary Expenditure and Revenues, Regional Average, 1997–2011
(percentage change)
Source: Author’s calculations.Turning to the composition of total expenditures, we find that on average public wages and salaries make up the biggest component of total expenditure in the Caribbean. Decomposing total expenditures in the region into five subcomponents (wages and salaries, interest payments, goods and services, transfers, and capital expenditures) reveals that public wages and salaries account for an average 8.1 percent of GDP (see Figure 2.7). Their share of GDP has been very stable over the last 15 years, falling only slightly to 7 percent by 2007 before increasing again to around 8 percent in the last three years.
Public wage growth outstripped real GDP growth over the last 15 years. Analyzing the real growth of expenditures on public wages and salaries together with real GDP growth shows that overall, the growth of real expenditures on public wages has been higher than real GDP growth during the last 15 years, excluding 1999 and 2010 (see Figure 2.8). The wage growth was particularly high in times of low GDP growth (e.g., 2001 and 2009). However, in years immediately after wage hikes, wage growth decelerated. For example, in 2010 public wage growth fell significantly and was below the growth rate of GDP.
GDP Growth and Public Wages, Regional Average, 1997–2011
(percentage change)
Source: Author’s calculations.GDP Growth and Public Wages, Regional Average, 1997–2011
(percentage change)
Source: Author’s calculations.GDP Growth and Public Wages, Regional Average, 1997–2011
(percentage change)
Source: Author’s calculations.Higher total expenditure during the financial crisis was mainly driven by increased spending on goods and services and transfers. The average spending on goods and services rose from 5 percent of GDP to 6 percent, while transfers climbed from 6 percent of GDP to more than 8 percent. Transfers are also the category that saw the biggest increase over the last 15 years. While they made up a mere 3.3 percent of GDP (being the lowest spending category) in 1997, they have increased strongly to 8.7 percent of GDP in 2011, becoming the largest spending category. Capital outlays fluctuated between 2.5 and 5 percent over the last 15 years. Interest payments increased from about 4.5 percent of GDP to over 6 percent by the mid 2000s before decreasing again to 4 percent in 2011.
Public Debt and Fiscal Balances During the Financial Crisis
This section takes a closer look at the effects of the financial crisis on the fiscal performance comparing the impacts to earlier downturns, while also analyzing how tourism-intensive and commodity-exporting countries differed.
Caribbean countries were severely affected by the global economic crisis due to negative spillovers from the United States and Europe. Tourism declined sharply, accompanied by declines in offshore activity and other services. Real GDP declined by 2.2 percentage points between 2008 and 2010, with tourism-intensive economies more strongly affected than commodity-exporting economies (see Figure 2.11).2 On the fiscal side, the region entered the recession with few fiscal buffers. Although government debt declined during the boom period of the mid-2000s, on average it was still around 55 percent of GDP in 2008.
Real GDP Growth, Regional Average, 1997–2011
(percentage change)
Source: Author’s calculations.Real GDP Growth, Regional Average, 1997–2011
(percentage change)
Source: Author’s calculations.Real GDP Growth, Regional Average, 1997–2011
(percentage change)
Source: Author’s calculations.Many countries responded to the economic crisis by loosening fiscal policy, thereby increasing the debt-to-GDP ratio. In particular, governments generally raised spending in an effort to curb job losses and to stimulate the economy. Since buffers in the form of public sector savings were limited or non-existent, governments borrowed more to finance higher current spending. As a result, public debt, on average, increased to around 70 percent of GDP in 2011 (though still below the nadir during the early 2000s). Further, the collapse of the financial conglomerate Colonial Life Insurance Company (CLICO) affected several budgets in the region, as countries financed measures to resolve the insurance crisis and to support the financial system.
Primary balances deteriorated in many countries, contributing to the buildup of public debt. The average primary balance declined from a surplus of 4.4 percent of GDP in 2008 to a deficit of 0.5 percent of GDP in 2009 (see Figure 2.9). During the growth slowdown in 2001–02 the drop of primary balances was about half that amount, as they decreased by around 2.5 percentage points of GDP over two years. The strong deterioration of the average primary balance in 2009 was driven almost equally by an increase in primary spending and a decline in revenue income (see Figure 2.10). The subsequent improvement of the primary balance was driven by higher revenue collection in 2010 before a primary spending increase led to a renewed, albeit small, deterioration in 2011. In 2001–02, the deterioration of the primary balance was mostly driven by expenditure increases and to a smaller extent by revenue decreases, while the recovery period in 2003 was due to both a revenue pick-up and an expenditure restraint. However, these developments for the entire region mask some differences between tourism-intensive and commodity-exporting economies, which will be explored next.
The global financial crisis impacted commodity-exporting and tourism-intensive countries differently. On average, commodity exporters had higher growth during the last 15 years (3.9 vs. 2.4 percent) and a better primary balance (3.5 vs. 2.1 percent of GDP). Particularly during the recent financial crisis, growth in commodity exporters was less impacted than growth in tourism-intensive countries. Growth in the former group fell by 2 percentage points to around 1 percent before recovering quickly to almost 3 percent; while the latter group went into a deep recession in 2009 with average growth barely hitting zero in 2011 (see Figure 2.11). Reflecting the commodity boom at the onset of the financial crisis, commodity-exporting countries had strong primary surpluses of around 8 percent of GDP in 2008. As commodity prices plunged in 2009, primary balances of commodity exporters went into deficit (see Figure 2.12). However, a year later primary balances had improved again, to 1.6 percent of GDP. On the other hand, in tourism-intensive countries primary balances halved from 2007 to 2008 and continued to decrease slowly thereafter being at 0.4 percent of GDP in 2011.
The somewhat different reaction of primary balances for the two country groups was rooted in different contributions of revenue and expenditure changes (see Figures 2.14 and 2.15). In commodity-exporting countries, the strong decline in primary balances was driven by both a revenue fall-off and an expenditure increase, whereas the smaller decline in primary balances in tourism-intensive economies was mainly driven by revenue decreases. However, the strong decline of primary balances in tourism-intensive economies in 2008 was due to expenditure hikes, which could be linked to high fuel and food prices that year. The subsequent recovery in commodity exporters was due to a strong increase in revenue and slightly falling expenditures. In tourism-intensive countries, primary balances deteriorated further as expenditures increased, while revenues increased only slightly.
Comparing the recent crisis with earlier episodes of growth slowdowns (1998 for commodity exporters and 2001 for tourism-intensive economies), one finds that experiences were quite similar. In 1998, both revenue decreases and expenditure increases contributed to the deterioration of primary balances in commodity exporters, while in 2001 the primary balance in tourism-intensive economies deteriorated mainly due to revenue shortfalls. The analysis also shows that primary balances were more volatile over the last 15 years in commodity-exporting countries than in tourism-intensive countries.
There are also noticeable differences in the behavior of government debt between tourism-intensive and commodity-exporting countries. On average, commodity-exporting countries’ debt ratios were similar to those of the tourism-intensive countries in 1997, both averaging around 60 percent of GDP (see Figure 2.13). However, subsequently commodity-exporting countries halved their debt from 64 percent of GDP in 2002 to 32 percent of GDP in 2011. The decline reflects the debt relief Guyana received under the HIPC initiative and Suri-name’s clearance of foreign arrears, which included partial debt write-offs. During the same period, tourism-intensive countries almost doubled their debt-to-GDP ratio from around 62 percent in 1997 to 104 percent in 2011.
Accounting for Public Debt Accumulation During the Crisis
In this section, we analyze what factors contributed to the accumulation of public debt during the financial crisis period 2008–11. In order to do this we follow the debt accounting methodology in Sahay (2005).3 This approach decomposes the accumulation of government debt into different factors, including interest payments, the primary balance, inflation and exchange rate effects, and other exogenous events modifying public debt.
The debt accounting exercise starts with the equation showing the evolution of government debt (equation 1). Total government debt in the next period Bt+1 decomposed into domestic (Dt+1) and foreign (Ft+1) debt, is equal to the current government debt stock Bt plus interest payments (itDt and rtFt), the primary balance PBt, and other events that modify public debt but do not necessarily appear in the fiscal accounts, RESt.4 Variables in foreign currency are converted to domestic currency with the nominal exchange rate St+1, which is measured in units of foreign currency per unit of domestic currency.
For the analysis, it is useful to express all variables as ratios to GDP. In this case, we also have to take into account that changes to the denominator have an impact on debt accumulation. Dividing both sides of equation (2.1) by GDP(PtYt) and rearranging gives equation (2.2):
The left-hand side shows the evolution of the debt-to-GDP ratio, where
The right-hand side shows the different factors’ contribution to the debt accumulation. Interest payments, represented by
on debt accumulation is negative. A higher real GDP growth can help contain the growth of the debt-to-GDP ratio. Similarly, the primary balance in percent of GDP, pbt, contributes negatively to debt accumulation. A primary surplus will help reduce the debt burden, whereas a primary deficit elevates it. Lastly, the residual rest includes exogenous debt-changing events and also captures inflation and exchange rate effects.
The results of applying Equation (2.2) to the Caribbean countries for the period 2008–11 are shown in Figures 2.16 and 2.17. They depict the cumulative debt buildup between 2008 and 2011 for the entire region, the two country groups, and individual countries.
Debt Accumulation Decomposition, 2008–11
(percent of GDP)
Source: Author’s calculations.Debt Accumulation Decomposition, 2008–11
(percent of GDP)
Source: Author’s calculations.Debt Accumulation Decomposition, 2008–11
(percent of GDP)
Source: Author’s calculations.
Decomposition of Accumulations by Country, 2008–11
(percent of GDP)
Source: Author’s calculations.Decomposition of Accumulations by Country, 2008–11
(percent of GDP)
Source: Author’s calculations.Decomposition of Accumulations by Country, 2008–11
(percent of GDP)
Source: Author’s calculations.The debt accumulation during the financial crisis period 2008–11 can be attributed to high interest payments and slow growth. On average, the debt-to-GDP ratio increased by 12.7 percentage points during 2008–11. This was driven mainly by high interest payments, which were responsible for about 90 percent of the debt buildup. The high contribution of interest payments was not due to higher interest rates, since these decreased on average from 5.2 percent (2004–07) to 4.6 percent (2008–11). Instead, this shows how the already high debt level elevates the debt burden even more.
Low GDP growth and primary deficits also contributed to debt accumulation. Several factors contributed to low or negative GDP growth during the financial crisis. Tourist arrivals dropped sharply as the major tourist markets (the United States and Europe) underwent deep recessions, which also affected offshore activity and other services negatively. In addition, traditional export sectors, including banana and sugar, faced competitiveness issues due to the loss of preferential trade agreements. In addition, some countries were hit by hurricanes that caused significant damage, creating a further drag on growth (examples include Dominica and St. Kitts and Nevis in 2008 and St. Lucia and St. Vincent and the Grenadines in 2010).
The residual, encompassing factors, such as inflation, exchange rate changes and other events changing public debt (e.g. debt restructuring), had a negative effect on the debt ratio. In tourism-intensive countries, the most important factor was the interest bill, while subdued growth also contributed to the debt increase of almost 16 percentage points. By contrast, the relatively higher real GDP growth rates in commodity exporters helped them to contain their debt accumulation to less than 3 percentage points.
Individual country experiences show varying levels of debt accumulation, but in the majority of countries the interest bill was the most important factor. Debt-to-GDP ratios increased in all countries with the exception of Guyana, and the magnitude ranged from as low as 3 percentage points of GDP (Suriname) to over 20 percentage points (Barbados and St. Kitts and Nevis). Interest payments were the most important contributor to debt accumulation in all countries but Antigua and Barbuda, The Bahamas, and Guyana.
For Antigua and Barbuda, the high negative residual can be explained by restructuring activities, while negative GDP growth contributed strongly to debt accumulation. In The Bahamas, the primary deficit was the most important contributor to the debt increase, as interest payments were comparatively low due to a relatively low initial debt level. In Guyana, the debt decrease was strongly facilitated by high GDP growth rates. Jamaica has a particularly high interest bill (on average over 10 percent of GDP), which more than overcompensated a high primary surplus. Similarly, in St. Kitts and Nevis and in Belize a primary surplus was overcompensated by other factors. In St. Kitts and Nevis, subdued GDP growth elevated the effect of interest payments. Belize’s debt increase was relatively small, as both a primary surplus and relatively robust GDP growth counteracted the effect of the interest bill.
Summary and Conclusion
This chapter has given an overview of the fiscal performance in the Caribbean over the last 15 years, focusing on the recent financial crisis period. Although there has been a period of debt reduction, the Caribbean countries entered the crisis with few fiscal buffers, which were fast depleted during the deep recession. Specifically, the high debt burden through high interest payments contributed to a further debt accumulation, which in some countries has been exacerbated by low growth rates and primary deficits. The differences between tourism-intensive and commodity-exporting countries are striking as well.
References
Egert, Balazs, 2011, “Bring French Public Debt Down: The Options for Fiscal Consolidation,” OECD Economics Department Working Paper No. 858 (Paris: Organization for Economic Cooperation and Development).
Helbling, Thomas, Ashoka Mody, and Ratna Sahay, 2004, “Debt Accumulation in the CIS-7 Countries: Bad Luck, Bad Policies, or Bad Advice?” IMF Working Paper 04/93 (Washington: International Monetary Fund).
Sahay, Ratna, 2005, “Stabilization, Debt, and Fiscal Policy in the Caribbean,” IMF Working Paper 05/26 (Washington: International Monetary Fund).
All figures including weighted averages use GDP as weights to calculate Caribbean averages.
The tourism-intensive economies are Antigua and Barbuda, The Bahamas, Barbados, Belize, Dominica, Grenada, Jamaica, St. Kitts and Nevis, St. Lucia, and St. Vincent and the Grenadines, while commodity-exporting countries include Guyana, Suriname, and Trinidad and Tobago.
For a detailed discussion of the debt accounting exercise also see Helbling, Mody, and Sahay (2004).
These events could either increase government debt, for example, the recognition of contingent liabilities, or decrease government debt, for example, debt restructurings. If the fiscal accounts only include the central government, changes of debt by public enterprises would also fall under this category.
