Media coverage of the coronavirus pandemic has fixated on the United States and the European Union’s collective efforts to combat fiscal contractions, where government revenue shrinks as the overall economy dips. But similar economic woes in developing countries have been largely overlooked. While the United States can operate with a large deficit in a crisis, countries with smaller economies cannot. They need more attention from the international community as they balance spending to promote the wellbeing of their citizens and their credibility with foreign lenders.
The Caribbean, hit hard by tourism’s collapse, is one of these struggling economic regions. On June 26, the International Monetary Fund (IMF), the world’s principal international body that prevents financial crises, predicted a combined annual GDP decline in 2020 of 9.4 percent in Latin America and the Caribbean.
But the Caribbean has been here before. Between 2010-2012, the region’s debt-to-GDP ratios were similarly high—above 100 percent—in countries like Jamaica and St. Kitts and Nevis. A high debt-to-GDP ratio means a country has high debt compared to its consumption, investment, spending, and exports, which deters foreign lenders from coming to its aid. As of now, debt-to-GDP ratios are still around 100 percent in both countries. Examining the history of debt in the Caribbean—a region known for historically high debt, as well as a dependency on tourism and a vulnerability to natural disasters—sheds new light on the IMF’s current pandemic response and provides a vision for economic recovery in the struggling region.
Past Approaches to Debt
With small population sizes and limited natural resources, Caribbean countries are vulnerable to economic shocks stemming from natural disasters like hurricanes, debt from unexpected macroeconomic trends, and shifts in tourism—all ingredients for unstable debt accumulation. Unstable debt accumulation is when a country has borrowed so much money that it faces an impossible choice between funding social programs and cutting spending to prevent further economic crises. In a world where every economy is intertwined, unstable debt accumulation not only deters lenders, but can also initiate a domino effect of global economic instability. In 2020, unstable debt accumulation is a pressing problem: the pandemic has proven to be an even longer, deadlier, and costlier threat than these historic sources of Caribbean instability.
In 2012, the IMF warned that debt ratios consistently above 60 percent make economies less able to accommodate external crises. With many Caribbean debt-to-GDP ratios now well above 60 percent, the region is at a precarious tipping point. International and domestic approaches to this problem often differ: while the IMF tends to recommend that a government cut spending to offset debt, regional finance ministries have often pushed for taxation to offset debt. As a compromise between these two rivaling perspectives on reducing debt, the IMF championed Medium-Term Fiscal Strategies (MTFS) in 2010—a series of temporary revenue-increasing measures which the IMF has relied on since their founding in 1945—to advance debt-reduction efforts in Caribbean countries. MTFS combine the greater taxation perspective many local finance ministries support, but limit them with short timeframes for their operation; MTFS also still rely on cutting government spending, but typically for specific programs.
The IMF had success with MTFS in 2010 when the St. Kitts and Nevis government had a debt-to-GDP ratio of 107 percent. To spike revenue in the short-term, St. Kitts and Nevis temporarily increased their value-added tax—shouldered by consumers—and instituted an environmental tax on new vehicles. Due to MTFS, St. Kitts and Nevis reduced their debt-to-GDP ratio to 60 percent in 2014. Similar short-term measures, like selling off unprofitable government-run enterprises and creating tax administration units to prevent tax evasion also upped credibility in other countries like Jamaica, where the MTFS framework imposed a series of medium-term tax increases on consumption and reduced government spending. These actions reduced unemployment from 15.25 percent in 2013 to 8 percent in 2020 and reduced inflation from 9.34 percent in 2013 to 3.91 percent in 2019.
MTFS were an appropriate strategy in 2010, when the region was buoyed by a strong tourism sector, but IMF economists now contend that MTFS alone are insufficient to support the Caribbean’s precarious pandemic economies. The executive secretary of the United Nations Economic Commission for Latin America and the Caribbean (ECLAC), Alicia Bárcena, stated on July 15 that greater unemployment will lead to significant increases in poverty and inequality for the region. ECLAC also predicted an unemployment rate of 13.5 percent by the end of 2020.
In Jamaica, as with other regions of the Caribbean, welfare programs were rolled out to assist citizens: the CARE program provided cash transfers to five hundred thousand Jamaicans, including the fifty thousand employees in the tourism sector who were laid off from their jobs when the coronavirus struck earlier this year. Despite cash transfer programs, young residents are still suffering from COVID-19 related budgetary and public health constraints. In early November, UNICEF reported that 97 percent of children in Latin America and the Caribbean are not receiving sufficient schooling and risk dropping out of the school system. Fixing these deficiencies and maintaining current transfer programs, which citizens now depend on for their livelihood, will demand large sums of foreign money. This is where the IMF’s role as the world’s financial regulator comes into play: it must now weigh these historic successes monitoring debt against a crisis never before seen in their seven decades of operation.
New Solutions, Old Ideas
As recently as March, the IMF supplemented MTFS with a loan expansion program funded by the IMF’s budget. The IMF’s budget is supported from countries’ member quotas, which is a subscription fee for being a member of the IMF. Loan expansion is like an airbag for acute shocks to the economy—it gives countries money to spend on disaster relief, slowing downward trends. The IMF has also relaxed earlier iterations of MTFS by encouraging government spending as long as governments “keep the receipts” in order to ensure that a country is transparent about their finances. Due to the Caribbean’s currently high debt-to-GDP ratios and need for further borrowing, keeping receipts on lending is vital to prevent fears of fiscal irresponsibility. Keeping the receipts leaves room for states in the Caribbean to borrow money from the IMF which flows to out-of-work citizens and provides them with lifelines to weather the pandemic.
In Latin America, examples of keeping the receipts have been promising, with countries like Brazil, Chile, and Peru all demonstrating that tourism-dependent economies can undertake debt if it is recorded transparently. A country transparently recording their lending is crucial to preventing concerns that a country may be using their loaned money improperly; by “keeping the receipts,” a country demonstrates to the IMF that it is using their lent money responsibly.
The IMF adopted MTFS again in October to boost lender trust, which will be necessary in the near future to assuage concerns over ballooning debt-to-GDP ratios. To respond to lender concerns, the IMF outlined two proposals for countries in the Western Hemisphere: one for countries with the ability to take on debt, and one for those that cannot. Indicators of this ability are historic levels of borrowing, timeliness on repaying debt, and rate of GDP growth. For countries with adequate room to spend, the IMF encourages temporary welfare programs that provide money and resources to citizens suffering from COVID-19-related challenges, cuts to payroll taxes to incentivize employment, and tax reductions more broadly. For countries with minimal fiscal space, the IMF called for emergency welfare lifelines, additional lines of credit from the IMF with commitments to enact MTFS at a later date, and deferred fiscal adjustments—all of which are to last until the pandemic abates. These approaches are the traditional, stable tools the IMF relies on to assess a country’s economic health, but by adopting loan expansion, the IMF has repurposed old tools to account for the unprecedented economic environment the Caribbean must weather.
The Caribbean’s relationship with the IMF is long standing, but COVID-19 has given their interactions a new sense of urgency. Going into shaky economic recovery from the pandemic means the Caribbean needs to borrow money, keep receipts, and issue immediate loans so that Caribbean economies do not find themselves further deprived of foreign-backed funds.
Amid the current global economic crisis, the IMF is urging Caribbean countries to prioritize financing these stabilizing programs whilst ensuring debt incurred does not become insurmountable. Even with these modified strategies, the IMF and Caribbean finance ministries will have to turn a keen eye to more inventive ways to keep debt stable to ensure recovery will be as smooth as the developed world’s.
Already, the IMF has proposed a novel way to help debt adjustment in the Caribbean during COVID-19: insurance clauses. Economists Peter Bruer and Charles Cohen have proposed making natural disasters like hurricanes or pandemics a caveat for debt repayments to be temporarily halted. By including these insurance-like conditions within borrowing agreements, countries in the Caribbean could have a respite from mounting debt and instead focus on rapid relief efforts. As the pandemic continues, the IMF reminds that there is no clear panacea, but with new ideas of insurance-like clauses coupled with traditional perspectives on medium-term financial strategies, a roadmap to a recovery in tourism and a reduction in unemployment for the region is beginning to unfold.
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