Inter-American Development Bank
facebook
twitter
youtube
linkedin
instagram
Abierto al públicoBeyond BordersCaribbean Development TrendsCiudades SosteniblesEnergía para el FuturoEnfoque EducaciónFactor TrabajoGente SaludableGestión fiscalGobernarteIdeas MatterIdeas que CuentanIdeaçãoImpactoIndustrias CreativasLa Maleta AbiertaMoviliblogMás Allá de las FronterasNegocios SosteniblesPrimeros PasosPuntos sobre la iSeguridad CiudadanaSostenibilidadVolvamos a la fuente¿Y si hablamos de igualdad?Home
Citizen Security and Justice Creative Industries Development Effectiveness Early Childhood Development Education Energy Envirnment. Climate Change and Safeguards Fiscal policy and management Gender and Diversity Health Labor and pensions Open Knowledge Public management Science, Technology and Innovation  Trade and Regional Integration Urban Development and Housing Water and Sanitation
  • Skip to main content
  • Skip to secondary menu
  • Skip to primary sidebar
  • Skip to footer

Caribbean Development Trends

  • HOME
  • CATEGORIES
    • Agribusiness
    • Antigua and Barbuda
    • Barbados
    • BehaviorChange
    • Belize
    • Bermuda
    • biodiversity
    • Blockchain
    • Caribbean
    • Caribbean Culture and Media
    • Climate Change
    • Creative Economy
    • Crime Prevention and Citizen Security
    • Data and Knowledge
    • De-risking
    • Dominica
    • Dutch
    • Early Childhood Development
    • Economic Growth
    • Education Policy
    • energy
    • entrepreneurship
    • Environmental and Climate Change
    • Events
    • Extractives
    • Finance
    • Fiscal Rules
    • gender
    • Governance and Regulatory Policy Reforms
    • Grenada
    • Guyana
    • Haiti
    • Health
    • Health Policy
    • Hurricane
    • Hurricane Irma
    • infrastructure
    • Innovation and change
    • Intellectual Property
    • IWD
    • Jamaica
    • JumpCaribbean
    • Labor
    • Labour Markets
    • MOOC
    • Music
    • Natural Disasters
    • Nurturing Institutions
    • OECS
    • Podcast
    • Poverty
    • Private Sector and Entrepreneurship
    • Saint Kitts and Nevis
    • Saint Lucia
    • Saint Vincent and Grenadines
    • skills
    • Sports for Development
    • Suriname
    • Technology
    • The Bahamas
    • The Blue Economy
    • Transportation
    • Tourism
    • Trinidad and Tobago
    • Uncategorized
    • VAWG
    • Webinar
    • women
    • Women for Change
    • youth
  • Country Offices
    • Bahamas
    • Barbados
    • Guyana
    • Jamaica
    • Trinidad and Tobago
    • Suriname
  • Press Releases
    • Bahamas
    • Barbados
    • Guyana
    • Jamaica
    • Trinidad and Tobago
    • Suriname
  • Authors

Why have Caribbean countries been so indebted, and what can they do to improve outcomes?

March 10, 2021 by Henry Mooney - Joan Oriol Prats - David Rosenblatt - Jason Christie Leave a Comment


Caribbean countries have long been among the most indebted on earth, and related vulnerabilities have slowed growth and poverty reduction across the region. Our chapter in Economic Institutions for a Resilient Caribbean—entitled: Debt Management and Institutions in the Caribbean: Best Practices and Priorities for Reform—focuses on debt-related vulnerabilities affecting Caribbean countries that are members of the IDB’s Caribbean Country Department—The Bahamas, Barbados, Guyana, Jamaica, Suriname, and Trinidad and Tobago.

In it, we undertake a detailed review of factors that have driven debt accumulation, identify common factors that have driven debt and related economic crises, and also review the evolving consensus with respect to sound international practices for debt management. In this context, we discuss priority reforms with the potential to help address existing deficits, and insulate Caribbean economies from future shocks, in order to support faster and more inclusive growth.

Caribbean Countries: Among the World’s Most Indebted

The history of public debt in Caribbean countries is striking. Several countries in the region have been among the most indebted in the world (measured in terms of the public-debt-to-GDP ratio) since gaining independence beginning in the 1960s (Figure 1). While economic and debt crises have been common throughout Latin America and the Caribbean over the past century—particularly when compared to other regions—the frequency, depth, and duration of such episodes for Caribbean countries makes it an outlier.

Debt vulnerabilities hinder growth…

This is particularly significant given the development needs of many Caribbean countries. High debt levels and weak institutions and capacity for public financial management have held back growth, incomes, and living standards for millions of people. Standard economy theory tells us that developing countries—where capital is scarce and labor is abundant—should borrow resources from abroad to support faster development. In this context, developing countries also tend to suffer from large and persistent public and social infrastructure deficits that act as brakes on private sector investment and productivity growth. Many of these deficits must be addressed with prudent public investment and expenditure, generally requiring governments to borrow both domestically and from abroad.

Given their history of recurring debt crises, Caribbean countries have undertaken numerous debt restructurings (though some have been characterized as voluntary in nature), and their governments have been forced to initiate some of the most severe fiscal adjustments ever contemplated in the context of emergency reform programs aimed at restoring debt sustainability and macroeconomic stability. For example, Jamaica recorded the highest average primary fiscal surplus in the world for a sovereign nation from 1990 to 2018 (7.3 percent of GDP), while other countries in the region, including Barbados and Trinidad and Tobago, also ranked near the top of the list globally on this measure over the same period (Figure 2). While this is only one measure, what is clear is that recurring crises have led to severe constraints with respect to fiscal space, acting as a break on critical investments in both infrastructure and social services, that developing Caribbean countries so badly require.

So why have Caribbean countries been so indebted and crisis prone?

There are many reasons for these outcomes. It is clear that initial conditions mattered for many of these countries, as the group includes some of the youngest nation-states in the hemisphere, and many were severely lacking in terms of financial and technical resources after gaining independence, amplifying existing vulnerabilities to economic and other shocks. Caribbean countries are small, open, and in most cases island economies, making them particularly dependent on external demand and capital flows, as well as susceptible to related shocks from abroad. Their small size and limited economies of scale have led to narrow production bases, and in some cases outsized sectors—for example, commodity exports or tourism—that further amplify vulnerabilities to swings in external demand. Similarly, their geography makes them among the most vulnerable on earth to weather-related shocks, as well as the implications of climate change.

In our chapter, we undertake detailed decompositions of debt dynamics for all six countries. Based on this analysis, we identify several common factors that have contributed to debt accumulation and related vulnerabilities across the Caribbean, including:

  • Fiscal deficits are not all that matters. In some cases, countries hardest hit by debt crises had been running large fiscal surpluses during their most pronounced shocks to public debt, bending against the prevailing wisdom that deficits always drive crises.
  • External risks from poor liability management. We find other factors, such as poor portfolio construction in terms of the currency and cost structure of debt, that left countries vulnerable to exchange rate shocks.
  • Contingent liabilities were important drivers. Countries also suffered from large shocks to sustainability from the crystallization of contingent liabilities and/or other unanticipated debt-creating flows. Deficits “hidden” in state-owned enterprises were an important factor compromising debt sustainability.

Taken together, these findings suggest that deficiencies in debt management institutions, practices, and capacity were important contributors to the region’s debt-related woes. In this context, our chapter provides a broad overview of international best practices related to debt management institutions, and discusses areas where Caribbean countries have scope for improvement, which can improve public financial management, and help to insulate our economies from future debt vulnerabilities. See Table 1 for a broad overview of sound institutions and practices in related areas.

While further diagnostics are warranted, our review of the history of debt accumulation in the Caribbean, the policy implications of these vulnerabilities, and common institutional deficits suggest that much remains to be done to bring Caribbean country practices and capacity up to the level of international sound practices. This will be a crucial undertaking for countries in the region, as they strive to establish and maintain macroeconomic stability, without which development aspirations are likely to remain unmet.

Listen to the podcast on Economic Institutions for a Resilient Caribbean

Filed Under: Caribbean Conversations, Economy & Investment, Innovation & Change

Henry Mooney

Henry Mooney serves as Economics Advisor with The Inter-American Development Bank (IDB). He previously worked with investment bank Morgan Stanley in London, The International Monetary Fund (IMF), The World Bank, and The Government of Canada, including on dozens of advanced and emerging market economies in Africa, Asia, Europe, Central Asia, Latin America and the Caribbean. Henry's responsibilities have included leading regional economic research and publications, serving as mission chief/team leader or team member for technical assistance focused on sovereign debt issuance, debt restructuring, market development, and public financial management, as well as producing forecasts in the context of adjustment programs and surveillance. He has also worked extensively on issues related to monetary policy, financial stability, regulation and supervision, financial access and inclusion, and his research has been published in a number of books, journals and appeared in the media (e.g., The Economist, The New York Times, Reuters, The Wall Street Journal, and many others). Henry currently serves as a member of The Atlantic Council's Financial Inclusion Task Force, Jamaica's Economic Policy Committee, as well as The IDB's Diversity and Inclusion Advisory Group and the Board of The IDB’s Afro-Descendant Alliance. He is a dual Brazilian and Canadian citizen, who completed his studies in economics and finance at Concordia University (BA), The London School of Economics (MSc), The University of London (PhD), and Harvard University (MPA).

Joan Oriol Prats

Joan Oriol Prats is the Lead Financial Specialist in the Connectivity, Markets and Finance Division at the Inter-American Development Bank. He has more than 15 years experience in sovereign risk management, structured finance solutions for sovereigns, financial regulation, and development and institutional economics. He is the Executive Secretary of the LAC Debt Management Group. Before the IDB, he worked in the Spanish public administration, academia, and as a consultant for several MDBs. He has a BA in Economics and a Ph.D. in Political Science from the Autonomous University of Barcelona and an MBA from ESADE Business School.

David Rosenblatt

David Rosenblatt is the Regional Economic Adviser for the Caribbean Country Department at the Inter-American Development Bank (IDB). Prior to this position, David worked for 27 years at the World Bank, where he divided his career between assignments in the Latin America and Caribbean region and the World Bank Chief Economist’s office. David holds a Ph.D. in Economics from the University of California, Berkeley.

Jason Christie

Jason Christie is an economist with the Inter-American Development Bank’s Caribbean Country Department in Jamaica, where he focuses on economic research and operations, including related to strategy development and programming for IDB lending and related activities. He began his career as a Financial Economist with the Bank of Jamaica’s Financial Stability and Payment Systems departments, where he contributed to the design of Jamaica’s Counter-cyclical Capital Buffer framework, and also conducted research on topics related to monetary policy and financial inclusion. Jason is currently pursuing his PhD in Economics at the University of Delaware, and holds an MSc in Economics and BSc in Actuarial Science from the University of the West Indies.

Reader Interactions

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

Primary Sidebar

Follow Us

Subscribe

Search

Caribbean Dev Trends

We provide unique and timely insights on the Caribbean and its political, social, and economic development. At the IDB, we strive to improve lives in the Caribbean by creating vibrant and resilient economies where people are safe, productive and happy.

Similar posts

  • Fiscal Limits for Developing Economies in Central America and the Caribbean
  • Suriname’s Debt Surge: What’s Driving It?
  • What are the prospects for growth in the Caribbean in 2017?
  • Are fiscal rules the solution to the Caribbean’s fiscal woes?
  • What does Shelly-Ann Fraser-Pryce’s training share with development best practices?

Footer

Banco Interamericano de Desarrollo
facebook
twitter
youtube
youtube
youtube

Blog posts written by Bank employees:

Copyright © Inter-American Development Bank ("IDB"). This work is licensed under a Creative Commons IGO 3.0 Attribution-NonCommercial-NoDerivatives. (CC-IGO 3.0 BY-NC-ND) license and may be reproduced with attribution to the IDB and for any non-commercial purpose. No derivative work is allowed. Any dispute related to the use of the works of the IDB that cannot be settled amicably shall be submitted to arbitration pursuant to the UNCITRAL rules. The use of the IDB's name for any purpose other than for attribution, and the use of IDB's logo shall be subject to a separate written license agreement between the IDB and the user and is not authorized as part of this CC- IGO license. Note that link provided above includes additional terms and conditions of the license.


For blogs written by external parties:

For questions concerning copyright for authors that are not IADB employees please complete the contact form for this blog.

The opinions expressed in this blog are those of the authors and do not necessarily reflect the views of the IDB, its Board of Directors, or the countries they represent.

Attribution: in addition to giving attribution to the respective author and copyright owner, as appropriate, we would appreciate if you could include a link that remits back the IDB Blogs website.



Privacy Policy

Copyright © 2023 · Magazine Pro on Genesis Framework · WordPress · Log in

Banco Interamericano de Desarrollo

Aviso Legal

Las opiniones expresadas en estos blogs son las de los autores y no necesariamente reflejan las opiniones del Banco Interamericano de Desarrollo, sus directivas, la Asamblea de Gobernadores o sus países miembros.

facebook
twitter
youtube
We use cookies on our website to give you the most relevant experience by remembering your preferences and repeat visits. By clicking “Accept”, you consent to the use of ALL the cookies.
Cookie settingsACCEPT
Manage consent

Privacy Overview

This website uses cookies to improve your experience while you navigate through the website. Out of these, the cookies that are categorized as necessary are stored on your browser as they are essential for the working of basic functionalities of the website. We also use third-party cookies that help us analyze and understand how you use this website. These cookies will be stored in your browser only with your consent. You also have the option to opt-out of these cookies. But opting out of some of these cookies may affect your browsing experience.
Necessary
Always Enabled

Necessary cookies are absolutely essential for the website to function properly. This category only includes cookies that ensures basic functionalities and security features of the website. These cookies do not store any personal information.

Non-necessary

Any cookies that may not be particularly necessary for the website to function and is used specifically to collect user personal data via analytics, ads, other embedded contents are termed as non-necessary cookies. It is mandatory to procure user consent prior to running these cookies on your website.

SAVE & ACCEPT