The objective of this paper is to analyze the growth performance of the ECCU countries since independence and the policy challenges they face to ensure sustained growth in the period ahead. Although tourism specialization may bring about higher growth, it could also increase volatility in growth by amplifying the impact of business cycles in source countries on the tourism sector. Low productivity growth is principally the reason for the slowdown in growth. High debt levels have been a major drag on growth.

Abstract

The objective of this paper is to analyze the growth performance of the ECCU countries since independence and the policy challenges they face to ensure sustained growth in the period ahead. Although tourism specialization may bring about higher growth, it could also increase volatility in growth by amplifying the impact of business cycles in source countries on the tourism sector. Low productivity growth is principally the reason for the slowdown in growth. High debt levels have been a major drag on growth.

II. Public Debt in ECCU Countries1

A. Introduction

1. ECCU countries have increased public debt in the last 20 years from already high levels. Total public debt of the six independent ECCU countries2 has been over 60 percent of the regional GDP since 1990, increasing to more than 100 percent in the wake of the recent global crisis. This contrasts with the generally declining debt ratios in emerging and developing economies3, and greatly exceeds the average public debt ratios associated with episodes of sovereign debt default in emerging markets over the past 30 years.4 To provide some insight into the sources of these high debt ratios, this chapter provides some brief background about public debt in the ECCU, then discusses the factors that contributed to the surge in debt, examines how governments were able to continue to borrow, and offers some provisional conclusions.

B. Overview of Public Debt in ECCU

2. ECCU countries are among the world’s most highly indebted. All six independent ECCU countries rank within the 15 most indebted emerging markets and developing countries, of which three (Antigua and Barbuda, Grenada, and St. Kitts and Nevis) have a public debt-to-GDP ratios of over 100 percent. All six countries exceed the ECCU’s target debt-to-GDP ratio of 60 percent.

A02ufig01

Public Sector Debt in Selected Emerging Markets / Developing Countries, end 2009

(In percent of GDP)

Citation: IMF Staff Country Reports 2011, 032; 10.5089/9781455213894.002.A002

Sources: IMF, World Economic Outlook; and Fund staff calculations.1/ Selected emerging and developing economies.

3. About half of the regional debt is owed to domestic creditors. Reliance on domestic sources is high, particularly in Antigua and Barbuda (63 percent of total public debt) and St. Kitts and Nevis (66 percent). St. Vincent and the Grenadines’ share of domestic debt is in line with the regional average of about 50 percent. About 10 percent of the regional debt is in arrears, concentrated in Antigua and Barbuda. Of the external debt, about 19 percent is multilateral.

A02ufig02

ECCU 6: Composition of Public Debt

(percent of total, end-2009)

Citation: IMF Staff Country Reports 2011, 032; 10.5089/9781455213894.002.A002

Sources: Country authorities and Fund staff calculations.

Composition of Debt

(as of end 2009)

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Sources: ECCB and Fund staff calculations.

As of end 2008

Aggregate of six countries.

C. What Contributed to the Debt Accumulation?

4. A simple analysis of the sources of debt accumulation shows that both the primary deficit and residual “other factors” have been key, while the differential between real interest rates and growth rates has played a minor role but in 2009.5 Central government primary deficits (excluding grants) contributed heavily to the rise in debt ratios in ECCU countries, accounting for over half of the total increase during that period. However, the size of the contributions from “other factors”—despite debt restructuring in Dominica (2004) and Grenada (2005)—suggest that public sector deficits may have been underestimated. This could reflect not only data limitations related to nongovernment public sector operations (including off-budget operations), but also contingent liabilities such as the granting of debt guarantees to public corporations.

A02ufig03

ECCU 6: Contribution to changes in public debt per year

(in percent of GDP)

Citation: IMF Staff Country Reports 2011, 032; 10.5089/9781455213894.002.A002

Sources: Country authorities and Fund staff calculations.

5. ECCU countries’ debt-to-GDP ratios declined from a peak of 112 percent of GDP in 2004 to 95 percent in 2008, but the global financial crisis prompted a sharp reversal. During 2005–08 the contribution of primary surplus, growth and grants supported an average reduction in the debt ratio of about 4½ percent per year. With the global downturn, however, the public debt ratio increased by about 13 percent of GDP to 108 percent in 2009 and is projected to rise marginally further to 112 percent in 2010, due continued declines in economic activity and the deterioration in fiscal balances. The primary deficit including grants deteriorated to 3.4 percent of GDP in 2009 from a small deficit of 0.5 percent of GDP in 2005–08.

A02ufig04

Change in Public Debt and Primary Balance

(in percent of GDP)

Citation: IMF Staff Country Reports 2011, 032; 10.5089/9781455213894.002.A002

Source: Country authorities.

6. These findings highlight the importance of fiscal consolidation, but also reveal that the need for complementary measures to place the debt on a firmly downward trajectory. Given different initial conditions in the ECCU countries, the required fiscal targets would vary by country. Targeted primary surpluses between 2.3 and 3.7 percent of GDP (including grants), envisaged under the current economic programs in Antigua and Barbuda and in Grenada, and as a policy objective in Dominica would put the debt dynamics in these countries on a sustainable path. However, without considerable adjustments in the other ECCU countries, the currency union and peg will be at risk.6 In the case of St. Vincent and the Grenadines as well as St. Lucia additional fiscal adjustments ranging from about 2 to 3 percent of GDP in comparison to the passive scenarios would be needed to ensure debt sustainability. Reflecting the very large public-debt-to GDP ratio, the adjustment in St Kitts and Nevis will have to be close to 10 percent of GDP. As pursued by Antigua and Barbuda, an accompanying collaborative debt restructuring could support the fiscal adjustment. The debt composition analysis, however, also reveals that additional measures need to be put in place to keep government activities from being transferred to off-budget operations (see Chapter III on public expenditure).

D. How was the High Debt Sustained?

7. Captive financial markets have supported the high and growing levels of debt in some countries. Within the banking sector, the exposures of indigenous banks to the public sector tend to be higher than those of foreign-owned banks. The heavy exposure of publically owned indigenous banks in St. Kitts and Nevis stands out, followed by that in St. Vincent and the Grenadines. The liquidity provided to the banks by the deposits from the national insurance schemes is critical for this arrangement, suggesting that the countries have been relying on captive financial markets.7 While the national insurance schemes in some countries are in surplus at the moment, changes in investment policy and demographics will likely limit the availability of such funding to banks going forward.

Banking Sectors’ Exposure to the Public Sector (Dec 2009)

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Including Anguilla and Montserrat.

Source: ECCB.

National Insurance Schemes’ Exposure to the Public Sector (Dec 2009)

article image

Excluding Anguilla and Montserrat.

Source: ECCB.

8. Looking forward, the public sector financing model in those countries that rely heavily on financing from the banking system should be changed. In this context, the banking sector regulatory framework should reduce the incentives for banks to favor lending to government over lending to the private sector. In addition, further development and deepening of the Regional Government Securities Market (RGSM) over the medium term could also help to reduce the exposure of banks to the public sector, to the extent that the RGSM attracts more regional and international investors to invest in T-bills and bonds issued by the ECCU governments.

E. Conclusion

9. ECCU countries have sustained high levels of public debt and remain among the most highly indebted in the world. About half of the regional debt is owed to domestic creditors, and the reliance is particularly high in Antigua and Barbuda and St. Kitts and Nevis, which have limited access to concessional external financing. High debt levels are in part the result of captive markets. Both the indigenous banking sector and national social security systems have played major roles in providing credit to the public sector.

10. A public debt decomposition shows that both primary deficits and other factors have contributed to the build-up of debt. Central government primary deficits were a key determinant of the build-up of public debt. While a number of countries are pursing primary surplus targets of 2–4 percent of GDP to put debt on a firmly downward trajectory, others still have follow suit. Depending on initial conditions, the required adjustments would range from 2 to almost 10 percent of GDP in comparison to the respective passive scenarios. The debt composition suggests that fiscal adjustments need to be complemented by measures to prevent the transfer of government activities to off-budget operations. Given the currency board arrangement and peg to the U.S. dollar, the implementation of fiscal reforms by all members simultaneously is paramount to avoid spillovers from the weakest member, which in turn can undermine confidence in the currency.

Appendix

Table 1.

ECCU: Total Public Sector Debt Accumulation by Components

(In percent of GDP, period average)

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Source: Fund staff calculations based on data from country authorities.Note: A positive (negative) sign means that the component contributed to an increase (decrease) in the public debt to GDP ratio.

Events include those that do not appear in the fiscal accounts but modify the public debt.

Figure 1.
Figure 1.

Debt Decomposition

(In percent of GDP)

Citation: IMF Staff Country Reports 2011, 032; 10.5089/9781455213894.002.A002

Sources: Country authorities; and Fund staff estimates.

References

  • International Monetary Fund, 2003, “Public Debt in Emerging Markets: Is it Too High?” in World Economic Outlook, September (Washington: International Monetary Fund).

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  • International Monetary Fund, 2010, “Global Prospects and Policies,” in World Economic Outlook, April (Washington: International Monetary Fund).

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  • Sahay, Ratna, 2006, “Stabilization, Debt, and Fiscal Policy in the Caribbean,” in Sahay, Robinson, and Cashin, eds., The Caribbean: From Vulnerability to Sustained Growth, (Washington: International Monetary Fund), pp. 1757.

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1

Prepared by Arnold McIntyre and Sumiko Ogawa.

2

In this note, the ECCU countries refer to the six independent members of the union, Antigua and Barbuda, Dominica, Grenada, St. Kitts and Nevis, St. Lucia and St. Vincent and the Grenadines.

3

The public debt-to-GDP ratio of emerging and developing countries has declined from around 50 percent in 2000 to 37 percent in 2009 (IMF, 2010).

4

Public debt was below 60 percent of GDP in 55 percent of the defaults recorded, and less than 40 percent in 35 percent of the cases (IMF, 2003).

5

For the methodology, see Sahay (2006). The analysis is conducted for the following four sub-periods to highlight the difference in the debt trajectories and the changes in underlying macro conditions: period of relatively stable debt ratios (1991-97), followed by years of sharp increase (1998-2004), subsequent declines (2005-08), and the recent rise in light of the global financial crisis (2009).

6

Implementing strong fiscal reforms simultaneously is paramount since fiscal cross-border spillovers from the weakest member can undermine the confidence in the currency.

7

The national insurance deposit accounts for 34 percent of total deposit at indigenous banks in St. Kitts and Nevis, compared to around 12 percent on average in other ECCU countries.

Eastern Caribbean Currency Union: Selected Issues
Author: International Monetary Fund
  • View in gallery

    Public Sector Debt in Selected Emerging Markets / Developing Countries, end 2009

    (In percent of GDP)

  • View in gallery

    ECCU 6: Composition of Public Debt

    (percent of total, end-2009)

  • View in gallery

    ECCU 6: Contribution to changes in public debt per year

    (in percent of GDP)

  • View in gallery

    Change in Public Debt and Primary Balance

    (in percent of GDP)

  • View in gallery

    Debt Decomposition

    (In percent of GDP)