SUSTAINING DEVELOPMENT IN SMALL STATES IN A TURBULENT

GLOBAL ECONOMY6-7 July 2009

Marlborough House, LondonCommonwealth Secretariat

Dr. Marielle GOTO, consultant

FISCAL POLICY AND CRISIS IN THE CARIBBEAN

Contents

Introduction: the crisis and the Caribbean I. The Bahamas fiscal policy response II. Jamaica fiscal policy response III. ECCU fiscal policy response IV. An example of external assistance

providing insurance: Petrocaribe Conclusions

Introduction: the crisis and the Caribbean

• Caribbean countries are affected by the ongoing crisis but there is a difference between oil importers and oil producers (Belize, Trinidad & Tobago).

• The results of the crisis are:

Decrease of the export part of demand and as a consequence of foreign exchange:

Tourism arrivals from Europe and North America decrease Shrinking trade volumes Slump in workers remittances (important part for Jamaica or St-Lucia)

Access restrained to international capital: concessional loans, commercial lending FDI

Current account deficits rise Volatility of commodity price , food price and energy price

Declining fiscal revenue Increase of unemployment

MACROECONOMIC STABILITY• Positive points

• Important domestic public debt for Jamaica and The Bahamas: less exposure to external financial markets

• Financial markets with low exposure to international finance

• Weaknesses

• Important public debt levels for countries like Jamaica or St Kitts & Nevis (debt sustainability problems)

• Vulnerability because of natural disasters• Financial vulnerability for countries of the ECCU

FISCAL POLICY STABILIZATION IN THE CARIBBEAN PRIOR TO THE CRISIS

Characteristics of Caribbean fiscal system

• There are different taxation structure in the Caribbean countries• Countries rely mostly on indirect taxes (taxes on international

trade) except for Trinidad & Tobago

• The tax burden also varies from a third of GDP (Barbados, Guyana) to 17% for The Bahamas

• Countries with VAT in 2004: Barbados, Jamaica, Trinidad & Tobago.

• ECCU countries are joining the club

Main source of Tax revenue in 2003 Countries

Indirect taxes Antigua & Barbuda, The Bahamas, Belize (2002), Dominica, Grenada, St Kitts & Nevis, St Lucia, St Vincent & the Grenadines

Direct taxes Trinidad & Tobago,

Balanced taxation Guyana, Jamaica , Barbados

Tax burdens in the CaribbeanCountries Tax Burden (Tax Revenue as a

percent of GDP) in 2003

Antigua & Barbuda 17,9

The Bahamas 17, 2

Barbados 29,8

Belize (2002) 18,3

Dominica 24,0

Grenada 27,9

Guyana 29,1

Jamaica 26,8

St Kitts & Nevis 23,5

St Lucia 21,7

St Vincent & the Grenadines 26,9

Trinidad & Tobago 23,1

DEFINITION OF FISCAL STABILZATION• Fiscal Policy has 3 objectives: allocation of resources,

distribution and stabilization• Stabilization is about absorbing the impact of shocks on

disposable income (counter-cyclical action)• Automatic stabilizers in developed countries are taxes on

income and transfers and subsidies• Following an elasticity approach we calculate elasticity of

various fiscal item and we establish a degree of fiscal stabilization

• Fiscal policy is often the most important tool of stabilization in countries with fixed exchange regimes like the ECCU

• Remind what is fiscal space : availability of budgetary room that allows a government to provide resources for a desired purpose without any prejudice to the sustainability of a government’s financial position.

I.THE BAHAMAS FISCAL POLICY RESPONSE

•Tax revenue accounts for nearly 100% of fiscal revenue•Taxes on international trade accounts for 65% of tax revenue•Tax burden was of 17%

•Most the fiscal expenditure is about personal emoluments (50% in average)•Susbidies and transfers are increasing ( 24% between 1999 and 2005)•Goods and services expenditures represent 21% of the fiscal expense

•The debt level is quite low : 34% of GDP in average•The goal was to achieve a level of public debt of 30-35% of GDP by 2012

•Overall balances and primary balances are low as interest payment is not an issue•Overall balances present a deficit average of 1,4%

Fiscal policy response in The Bahamas

DEGREE OF FISCAL STABILISATION

REGRESSION TAXTRANS

Elasticity 0,2

Tax/GDP 0,1

Degree of stabilisation (%)2,4

As the previous charts suggested fiscal stabilization is very low in The Bahamas

Actions implemented by the government

• The Bahamas had a sound situation before the crisis

• The crisis induced a contraction of GDP of 1.7% in 2008 compared to a 0.7% in 2007 and a contraction of 3,9% is forecast for 2009. The overall deficit reached 5.7% in 2008.

• The country has launched fiscal plans aiming at buffering the shocks with maintaining expenditures:

Development of E-government (teledeclaration forms) Decrease of arrears in real property estate Limiting overtime pay for civil servants Auditing transfers to regional entities Implementation of an unemployment insurance in 2008

For 2010:

the government plans privatization of 51% of The Bahamas Telecommunications Company

Emission of sovereign external bond to refinance domestic bank

Conclusions

• Fiscal space is created trough a better tax compliance

• Privatization allows to find new sources of funding

• The fiscal situation is sustainable at the moment due to good governance in macroeconomic policies

• But fiscal stabilization seemed not to be very important with the prior fiscal structure

II.JAMAICA FISCAL POLICY RESPONSE

Importance of Tax on goods and services as they represent an average of tax revenue of 42% for 2000-2006. Decrease of Taxation on income that represents 26.3% for the period.

The most important part of current expenditure is interest payments:they represent about 40% of current expenditure between 2000 and 2007.Personal emoluments represent 34% of current expenditure for the period.

Average level of debt between 2000 and 2007: 136% of GDP

Average level of overall deficit between 2000 and 2007: -6.1% of GDP.In 2007 the deficit reached -30.7% of the GDP

FISCAL POLICY RESPONSE IN JAMAICA

DEGREE OF FISCAL STABILISATION IN JAMAICA

1993-2006 1993-2006 1998-2006 1993-2004 1998-2006 1993-2001 1998-2004

REGRESSION TAXREV TAXTRANS TAXGOOD CURREX PERSEM TRANSUB INT

Elasticity 0,5 0,1 0,7 0,2 0,0 0,3 0,1

Tax/GDP 0,2 0,0 0,1 0,3 0,1 0,0 0,0Degree of

fiscal stabilisation

(%) 11,2 0,3 8,7 5,0 -0,4 0,0 0,0

Fiscal actions regarding the crisis• A stimulus package for tourism of $634 M was

implemented at the end of 2008 : concessionary loans to the different sector hotels in order to create 'new tourism', built on marketing, product development and investment

• Evaluation of public agencies of IT in order to cut costs (there are many a lot off out budget entities in Jamaica)

• The government is discussing with the IMF in order to benefit from additional financing through a IMF stand-by facility in order to keep the country's medium-term economic program on track

Conclusions• Fiscal measures have been implemented• The numerous tax holidays for sectors like tourism,

shipping or bauxite and alumina could be reduced in order to gain fiscal space

• The stimulus package for tourism seems to be a success , at the moment, as no hotel has been closed

• The room for manœuvre is not very important because of the previous debt level and substainability questions

• Still, GDP seems to react more than in some other Caribbean countries to fiscal variables: there is a higher degree of stabilization for taxes on goods and services

III.EASTERN CARIBBEAN CURRENCY FISCAL POLICY RESPONSE

The average weight of some fiscal items in the ECCU for the period 1980-2001

Name of the fiscal variables series

Part of the current fiscal revenue

(%)

Part of the current expenditure (%)

Taxes on Income and Profits

TAXINC 19,9

Taxes on International Trade and Transactions

TAXTRANS 48,4

Taxes on Domestic Goods and Services

TAXGOODS 12,7

Grants GRANTS 6,2

Personal Emoluments PERSEM 52,3

Current Expenditure CUREX 28,6

Transfers and Subsidies

TRANSUB 11,8

Interest Payments INT 11,9

Degree of fiscal stabilization in the Eastern Caribbean Currency Union (ECCU) between

1983-2001St Kitts & Nevis Grenada St-Lucia St Vincent & the

Grenadines

Taxes on international and

transactions Elasticity

0,84 0,84 0,84 0,84

Personal Emoluments

Elasticity

Non significant Non significant Non significant Non significant

Taxes/GDP 0.11 0.13 0.14 0.12

Expenditures/GDP 0.12 0.13 0.12 0.13

Degree of stabilisation

(%)

9.24 10,92 11,76 10,08

Fiscal Policy actions• The overall deficit should reach for the region 6.8% of GDP in 2009 compared to

4,7% in 2008

• Debt-level as an average was of 91% in 2008

• St. Vincent & the Grenadines, Dominica and St. Lucia have requested financing under the Exogenous Shocks Facility of the IMF

• Grenada has requested an augmentation under its PRGF (Poverty Reduction and Growth Facility) Arrangement of the IMF

• St. Kitts &Nevis has requested a purchase under the Emergency Assistance for Natural Disasters Facility.

• Taxation system structure: implementation of VAT in Dominica (2006), Antigua & Barbuda (2007), and St. Vincent & the Grenadines (2007)

• Grenada, St Kitts & Nevis and St Lucia are to introduce them in 2010

• Introduction of unemployment insurance in Antigua & Barbuda, higher public assistance payments in Grenada, and increases in conditional cash transfer programs in St. Lucia.

Conclusions

• These states are still highly vulnerable because of natural disasters and financial sectors weaknesses

• It is necessary to resort to external funding because of the initial bad fiscal situation and because of the unstainability of debt

• St Lucia has one of the best responsive fiscal stabilization in the Caribbean even if it remains low

• The ECCU is trying to resort to mechanism insurance in order to absorb shocks (pooling of resources) creating a new form of fiscal space

IV. Example of external assistance: Petrocaribe

External assistance :Petrocaribe• Concessional financing on petroleum imports from

Venezuela, an oil producer• The terms of this financing are common across countries :• 25-year maturity, with a 2-year grace period, at an interest

rate of 2 percent• The amount of available financing varies, being governed

by an import quota negotiated bilaterally with Venezuela in thousands of barrels per day

• The share of imports that can be financed, as well as the grant element of the loan, fluctuate with the world price of oil.

• It can be considered as an insurance mechanism from oil shocks among an oil producer and oil importers

• Oil Bill and Expected FinancingUnder Petrocaribe, 2008

Oil bill(% of GDP)

Financing (US$ bn)

Financing (% of GDP)

Dominica 9.9 0.0 0.0

Grenada 10.5 0.0 1.2

Guyana 30.9 0.1 6.2

Jamaica 15.5 0.8 6.2

CONCLUSIONS• Fiscal stabilization seems not to be very important in the Caribbean• The better the situation before the crisis the leeway available (The Bahamas, Trinidad &

Tobago)• It remains an inherent need for foreign financing for the smaller states• In other countries like oil producers with a stabilization fund (like Trinidad & Tobago with the

Heritage and Stabilization Fund), a last resort source of domestic funding exists• Alternative sources of funding to have some fiscal space with kind of insurance mechanisms:

for non oil producers insurance mechanisms to absorb oil shocks exist like Petrocaribe (implemented in 2005) or natural disasters shocks like the Caribbean Catastrophe Risk Insurance Facility (CCRIF) established in 2007

• The need for foreign financing will depends of the duration and the magnitude of the crisis

• Fiscal space can be created with an improvement in tax collection, the development of E-government or the decrease of tax holidays, holidays, tax exemptions, tax credit, tax break, duty concessions and other waivers and different tax relief. Indeed, it is inefficient in stimulate the sectors concerned (tourism, shipping…).

• More than ever there is a need for close monitoring of public finances• Assessment of the firms and sectors the more at risk is essential• Regulation and monitoring should be implemented keeping in mind that the firms and

sectors helped will use the money to restructure and reinforce their best practices