The COVID-19 pandemic caught the world by surprise, causing an unprecedented health emergency. Caribbean countries adopted containment measures to slow the spread of the disease and flatten the curve based on prior experiences and lessons around the world. Actions ranged from limits to social activities and closure of non-essential businesses, to curfew hours and complete lockdowns. While desirable from an epidemiological perspective, restricting social interaction has led to enormous economic costs and sparked the debate of “saving lives vs. saving livelihoods.”
For the six Caribbean countries within the IDB’s Country Department Caribbean (CCB), the difficulties are more dramatic and threaten to leave a permanent mark. These economies have been traditionally weak in fiscal terms even in the best of times. The collapse in economic activity around the world has left them particularly exposed, as they rely heavily on tourism, remittances, and natural resources. They face both significant current account and trade deficits. Primary balance deterioration has led debt to GDP ratios to rise from less than 40 percent in the mid-1990s to over 80 percent in 2019. Even though the exact debt path differs by country, these trends have sparked concerns about fiscal sustainability in the region.
Rising debt and pro-cyclical economic model
The economic model of the Caribbean has historically been one of pro-cyclical spending, driven by public employment —mainly through state-owned enterprises (SOEs)‑—, and high external debt. Debt has risen considerably compared to the pre-financial crisis levels in the region, shrinking fiscal space, which, combined with poor governance to manage shocks, makes it very hard for governments to deploy funds and resources to fight the pandemic. These economies also have a substantial informal sector, of up to 60 percent of the workforce, and an already falling Total Factor Productivity. The COVID-19 shock will disproportionately hit the lower end of the income distribution, causing severe unemployment problems.
Despite their financial constraints, all CCB have taken fiscal actions. The main measures are increased funds for health expenses, transfers to households in the form of social security benefits paid in cash or in kind, and support for small and medium-sized enterprises (SMEs). The Bank is actively supporting CCB countries through technical assistance and policy programmes that aim to strengthen the efficiency and effectiveness of fiscal policy and management in response to the health and economic crisis caused by COVID-19, through the design and implementation of effective and fiscally responsible policy measures. Countries working with the Bank include Barbados, Jamaica and Trinidad and Tobago.
Due to the global collapse in demand, the Caribbean region is facing a significant decline in the exports of goods and services, as well as remittances. This is particularly worrisome for CCB countries given their economic structure. In The Bahamas, Barbados, and Jamaica, the share of tourism in GDP is between 10 and 20 percent, much higher than the world and medians for the Latin America and the Caribbean (LAC), and its direct contribution to employment is even more significant (see Figure 1). Besides, the collapse in commodity prices, especially the shock to oil, has significantly decreased the terms of trade and tax revenues of the commodity-driven economies in Guyana, Suriname, and Trinidad and Tobago.
The Economic Policy Conundrum Post COVID-19 Containment
The region will face several challenges. To begin with, most of the measures adopted so far are containment-oriented: funds used for current consumption rather than production, which entails borrowing from the future to pay for transfers today. As a V-shaped recovery now appears to be a distant dream, CCB governments will need policies that focus on long-run growth. Besides, what should be the size of the package considering that both the fiscal space is very tight and the fiscal channel is less efficient? A stimulus of 3 percent of GDP (the average recovery package in LAC after the 2008-9 crisis) looks too small for the current crisis, as some countries have already spent 2 percent in temporary relief, but also significant for current debt ratios.
Finally, and most importantly, how will countries finance the widening fiscal deficit from increased spending and reduced revenues? None of the Caribbean economies can fund it with domestic resources. Austerity is not a possibility, either, since the extra spending is needed for containment, mitigation, and recovery. Devaluation will not be useful as world demand is currently too depressed; plus, the CCB debt is denominated in dollars. Furthermore, there has been a flight to safety in international financial markets, as reflected by the recent broadening in Emerging Markets Bond Index (EMBI) spreads, and LAC is experiencing (yet again) a sudden stop.
There are reasons to believe that the shock will be somewhat permanent. If advanced economies can recover but not to 100% of their potential during the medium to long term, that would have a cascade effect on the CCB economies, as they depend so strongly on external demand and remittances. Keeping all of this in mind, we provide some policy recommendations.
Three Policy Recommendations for the Caribbean
Be Smart. Countries in the region should apply smart containment and mitigation measures. This implies acting fast and maximizing efficiency for urgent matters, or whenever new information will not likely change the course of action, like acquiring more testing kits. For all other decisions, governments should do active learning by collecting high-frequency data. Smart mitigation uses targeting to maximize the efficiency of government spending. Since lockdowns are very regressive for workers, policies should be aimed at redistributing income and providing liquidity to the most vulnerable households and firms. Also, governments should primarily focus on economic recovery measures, as this will be the most significant challenge when the health emergency is overcome.
Be Clear. For these policies to succeed, it is essential to ensure (a) good communication, (b) that they are temporary, and (c) ease of access. Policy communication should aim to maximize the receiving audience and deliver simple yet effective messages. The temporary nature of the policies is crucial to guarantee long term sustainability and not to distort future incentives. The Caribbean has a long history of permanent “temporary” measures that have contributed to the current fiscal deficit and debt burden. Ease of access is critical to protect the most vulnerable population. Since the financial sector in the region is underdeveloped, with over 40% of the working-age population lacking a bank account, the state-owned enterprises could help address the implementation challenges acting as a vehicle for the provision of benefits.
Be Strategic. Regarding funding, CCB countries will need to adjust their current and planned public spending to meet current needs. This implies shifting their public spending away from the longer-term (and less urgent) but more profitable capital expenditure projects. Given that most spending in the Caribbean is in current rather than capital expenditures, it would not be surprising to see governments turn to the SOEs in search of funds. In a context of numerous SOEs that face frequent losses, this could be used as an opportunity to rationalize public enterprises and keep only the most productive ones. CCB countries should also consider cutting the public wage bill, as it will be hard to reduce the size of the government. Finally, they should request emergency funding from international financial institutions.
 That means keeping the rate of contagion low enough so that healthcare capacity is not overwhelmed.
 The IDB’s Caribbean borrowing member countries include The Bahamas, Barbados, Guyana, Jamaica, Suriname and Trinidad and Tobago.
 The active learning process is discussed in detail in Andrabi et al., Smart Containment with Active Learning: A Proposal for a Data-Responsive and Graded Approach to COVID-19 (2020)