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The Dark Side of Debt

The Caribbean is often described using the moniker “high debt, low growth,” yet this has not truly been the case until recently. The Caribbean Economic Team’s Quarterly Regional Bulletin contends that debt is or is forecasted to become too high in the Caribbean—perhaps crossing into the “dark side.”

The Caribbean debt benchmark, used to judge whether debt is too high, is derived from Caribbean economists Greenidge and Craigwell’s estimated relation between debt and economic growth (see figure). The inverted U– shaped relation shows that for a debt-to-GDP ratio lower than 30 percent, any increase has a positive marginal and average effect on economic growth. However, for a debt-to-GDP ratio higher than that level (the turning point on the inverted-U curve), any further increase has a negative marginal effect; furthermore, for higher than 60 percent, dubbed “the dark side,” the effect (marginal and average) becomes negative.

Three tourism-dependent countries—The Bahamas Barbados, and Jamaica—are in the “dark side” of the debt–growth relation. However, commodity exporters—Guyana, Suriname, and Trinidad and Tobago—are still below the 60 percent threshold, which is likely to change. The International Monetary Fund’s medium-term projections show that the debt ratio for Guyana and Trinidad and Tobago will exceed the threshold at 61 and 92 percent of GDP, respectively, by 2017. Suriname’s debt ratio is expected to stabilize at less than 60 percent of GDP under the auspices of a program from the International Monetary Fund. Jamaica and—to a lesser extent—Barbados are forecasted to reduce their debt ratios but remain in the dark side of the debt–growth relation. As being done in Jamaica, fiscal efforts are necessary for mitigating debt.

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