Regional Development Issues - Caribbean Development Bank

Regional
Development
Issues
Shared Regional Development Challenges
An examination of recent economic performance by
the BMCs of CDB reveals cause for serious concern with
respect to critical aspects of social and economic development within the sub-region. We refer to the high
levels of indebtedness, deep-seated pockets of poverty
within member countries even among those in which
economic growth is robust, weak performance of the
agricultural sector, and elusive efforts to craft a viable
transportation policy and strategy to support the tourism and hospitality industry which is the leading sector
in several of the Bank’s BMCs.
Fiscal Performance and Public Sector Indebtedness
There has been increasing concern about, and focus on,
the fiscal performance and level of indebtedness of the
region’s governments consequent upon the pursuit of
debt restructuring in Dominica, Grenada and Belize in
recent times. Added to this, Guyana is, and soon Haiti
will be, receiving major debt forgiveness under the
Highly Indebted Poor Countries (HIPC) Initiative. For
developing countries, the use of external savings is critical for development. However, these resources must be
used efficiently, so that capacity is built and utilized, resulting in income and export growth that facilitates the
service of these liabilities. The efficient use of borrowed
resources by government is a fundamental part of this
requirement in developing countries where the state
plays a vital role in the economy. Efficient resource use
will manifest itself in a manageable debt burden. However, debt stocks and debt burdens have risen to fairly
high levels in the region, reflecting inefficient resource
use, but also poor debt management and the impact of
a series of shocks. High levels of debt can impair growth,
discouraging investment by creating uncertainty or the
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CDB Annual Economic Review 2006
expectation that adjustment measures are inevitable,
so that returns will be eroded by such measures.
Against the background of increasing focus on fiscal
performance and debt levels, the fiscal performances
of BMCs were mixed when compared with generally
accepted standards,1 but most countries improved
in 2006. Nine BMCs are hosting some aspect of CWC,
and expenditure related to this event influenced fiscal
performance significantly in these countries. However,
rising concern about debt levels, and the implementation of adjustment programmes – whether formal IMF
programmes or not – have resulted in an increasing
emphasis on improving fiscal performance. At the end
of 2006, all but two BMCs had lower debt-to-GDP ratios
when compared with 2005. While this reflected the improved fiscal performances, it was also a reflection of
the high rates of GDP growth.
The central government current account balances of 11
BMCs were greater than 4% of GDP. However 14 countries had better outcomes in 2006 than they did in 2005.
The overall balances of 11 countries were greater than
negative 3% of GDP. Many countries implemented revenue-enhancing measures, but some of the improvement reflected the buoyancy of the revenue systems. All
of the British Overseas Territories continued to perform
well, influenced largely by the performance guidelines
imposed by the Foreign and Commonwealth Office of
the British Government. Consequently, current account
and overall balances of these governments exceeded
the approved benchmarks. Among the independent
1
The standards referred to here are the following: a current account balance equal to or greater than 4% of
GDP; an overall balance equal to or greater than minus 3% of GDP; and a debt-to-GDP ratio equal to or less
than 60%.
Regional Development Issues
members of the Eastern Caribbean Currency Union, the
thrust towards fiscal sustainability, which started with
the identification of fiscal performance guidelines in
2002, resulted in improved current account balances in
2006. However, of the six independent ECCU countries,
only St. Lucia and Grenada had current account balances greater than 4% of GDP. Ironically though, the overall deficits of these two countries, which are below the
accepted threshold, worsened, mainly because of ICC
World Cup related capital expenditure.
Of the larger BMCs, Bahamas, Barbados and Trinidad
and Tobago had current and overall balances above
the threshold in 2006. This notwithstanding, the performances of Barbados and Trinidad and Tobago were not
as strong as in 2005. Belize and Jamaica had current account balances that were less than 4% of GDP, but their
overall balances were better than the threshold of 3%
deficit, reflecting the influence of interest payments on
fiscal performance in these countries.
The debt-to-GDP ratios of most countries declined in
2006. This resulted from favourable debt dynamics,
mainly reflecting high GDP growth rates, but to a lesser
extent, a combination of good performances on the
primary accounts and lower average effective interest
rates on the debt stocks of governments. The only increases in debt-to-GDP ratios occurred in St. Lucia, and
St. Vincent and the Grenadines. Guyana benefited from
significant debt write-off as part of the Highly Indebted
Poor Countries initiative.
In order to improve or maintain fiscal sustainability in
the medium-term, the challenge for regional governments is to improve their debt dynamics to the extent
that they can do so. The main focus has to be on maximizing primary balances. In this regard, there must be an
ongoing focus on improving revenue systems to maximize revenue intake; and improving budget management to ensure that expenditures are efficient. These
actions would also facilitate improved growth rates,
and thus create favourable debt dynamics. Additionally, debt management systems need to be enhanced in
order to minimize debt cost and manage debt burdens.
Antigua and Barbuda, Dominica, Grenada and Guyana
have all benefited from debt restructuring of some form
that have altered their debt dynamics, while Belize is in
the process of negotiating a debt restructuring with its
external commercial creditors.
Poverty
Poverty studies within the sub-region confirm the
changing multifaceted nature of poverty which present
Regional Development Issues
its own peculiarities and special characteristics. These
characteristics include the unacceptably high levels of
relative and absolute poverty, with broad segments of
society (particularly those living just above the poverty
line) at risk of slipping into poverty. Compounding this
is the extreme vulnerability of many Caribbean economies caused by exposure to frequent natural hazard
events and economic shocks which impact greatest on
the poor.
While many of the causes of poverty in the sub-region
have existed for some time, there are new forces and
factors that contribute to the complexities and persistence of various forms of poverty, thereby increasing
vulnerability in the Region. These include:
(a) growing economic disparities within countries
and communities;
(b) the reduced capacity of the State to satisfy the aspirations of citizens;
(c)
changes in personal consumption patterns;
(d) the emergence of new health issues, especially
the HIV/AIDS pandemic;
(e) the growing importance of personal and community security and safety issues;
(f )
the impacts of environmental degradation and
environmental uncertainty on livelihoods; and
(g) the weakening of traditional institutions, in particular the extended family, and its impacts on the
most vulnerable including single-parent households, the elderly, the physically and mentally
challenged.
Poverty in the region has also been impacted by historical factors, and while there has been progress in all areas of social development, the phenomenon has taken
new forms and dimensions, particularly with respect to:
(a) the growth in urban poverty, which is often associated with migration from rural areas, fuels
increased crime, and intensifies feelings of economic insecurity and conduces to negative environmental impacts;
(b) new forms of rural poverty, especially in countries
affected by new and adverse global market arrangements relating to traditional export crops;
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the socioeconomic impact of HIV/AIDS , particularly in respect to persons in the 20-34 age cohort;
label. This follows an announcement by a major food retailer in the United Kingdom that its entire banana supplies will be Fairtrade certified.
(d) the ageing of populations, accompanied by inadequate social protection networks; and
Challenges to the sector however remain, due largely to
the implementation of reforms to the European Union
(EU) banana import regime. The most recent of these
reforms occurred in January 2006, when the EU eliminated the quota system which controlled the volume
of bananas imported from countries – mainly in Latin
America – enjoying Most Favoured Nation status. The
quota system has been replaced with a new import tariff of 176 euro per tonne and a duty free annual import
quota of 775,000 tonnes for African, Caribbean and Pacific (ACP) bananas. Thus, in addition to the traditional
competition from banana producers in Latin America,
regional producers will also be competing with producers from Cameroon.
(c)
(e) new forms of international migration, including
movements of political and economic refugees.
It is becoming increasingly clear that the issues of poverty have become more nuanced, therefore in the context of rapid social and economic changes at global,
hemispheric and local levels, there continues to be the
need to apply appropriate scientific methodologies to
collect and analyse data which expands understanding
and explanation of the shifts. It is imperative that the
data derived be used systematically by stakeholders including government authorities in decision making at
both the policy and planning levels. Although there is
some evidence of this, collective experiences across the
Region have shown that much more work needs to be
done to support the process of evidence-based policy
formulation and decision making. It is in this area of
development assistance that CDB provided significant
support to BMCs to assess poverty and its multiple dimensions. Support has also been given through other
initiatives like poverty reduction policies and strategies
to strengthen the countries’ capability to integrate poverty reduction concerns in their national development
programmes.
Agriculture and Food Security
A review of the main economic indicators reveals a
slight improvement in the performance of the agricultural sector in the Caribbean Development Bank (CDB)
Borrowing Member Countries (BMCs) in 2006 when
compared to 2005. The sector in general benefited from
more favourable weather conditions, improvements in
market access and more stable prices. However, several
challenges continue to hamper growth. Increases in
production were reported in many of the BMCs, in particular in Belize, Guyana and Jamaica, in the latter two
countries due in part to their recovery following the
damaging effects of floods and Hurricane Ivan in 2005.
Bananas
Production of Bananas in the Windward Islands (WI) increased by 5.5 percent with a corresponding increase in
revenue of 7.4 percent. The trend is likely to continue in
2007 as producers attempt to take advantage of more
stable prices by exporting bananas under the Fairtrade
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CDB Annual Economic Review 2006
Sugar
Belize and Guyana both recorded increases in sugar
cane production while in Barbados output from the industry contracted by 12.0%. The region however continued with plans to modernize the sugar industry with
a movement away from reliance on the production of
raw sugar for export, to the production of high valueadded products (e.g. branded products for direct consumption) and other derivatives (e.g. Ethanol and biofuel). These changes are to a large extent triggered by
amendments to the EU sugar regime, implementation
of which commenced in July 2006 with a price cut of
5%. Implementation of these reforms is expected to
continue over the next three years resulting in an overall price cut of 36%.
Rice
Extra-regional trade in rice represents the sole bright
spot in traditional exports. The rice industry in Guyana
benefited from changes in the international trading environment. This was achieved through improved market
access for Guyanese rice to the European Union (EU),
the result of a ban imposed on rice imports from the US
which contain an illegal genetically-engineered variety.
Non-Traditional Crops and Livestock
Production of these commodities is generally geared
towards national and regional markets. Due to the relatively small domestic market in most BMCs the benefits
of economies of scale are difficult to attain. Poor regional transportation links, inadequate marketing infrastructure, information and distribution systems hamper
marketing efforts to take advantage of opportunities
Regional Development Issues
within the region. The sector also suffers from relatively high production costs and low rates of adoption of
modern technology with the resultant effect being a
lack of competitiveness with extra-regional imports.
Impact on the Rural Population
The adverse effect of the abovementioned factors has
been most profound on the rural populations whose
livelihoods, in most of the BMCs, have been disproportionately dependent on the fortunes of traditional agricultural exports. Due to the poor returns from the sector
there continues to be a shift out of agriculture to other
sectors, in particular tourism and construction.
On-going Initiatives
Notwithstanding the challenges faced by the sector,
initiatives are being pursued to create opportunities
for increasing agricultural production and strengthening inter-sectoral linkages. These initiatives are geared
towards improving the region’s food security status and
reducing rural poverty.
At the regional level, CARICOM Heads of Government
have defined and begun implementation of a series
of actions focussing on alleviating key binding constraints to agricultural development in the region. A
CORE Group, comprising regional agencies working
in the sector including CDB, has been established and
mandated with the responsibility for coordinating the
implementation of this initiative.
At the national level, some countries have reported progress with the introduction of new technologies, specifically improvements in drainage and irrigation systems
and the use of greenhouses. These have helped to mitigate the effects of weather-related shocks and even out
the production of high-value commodities. Progress has
also been made with regard to establishing closer linkages between agriculture and tourism with some hotels
establishing contractual arrangements with farmers for
the supply of fresh fruits and vegetables. In addition the
development of Caribbean cuisine, improvements in
production technology and niche marketing are being
vigorously pursued.
Airline Industry
The Regional Airline Industry Air transportation services are particularly important to small island countries
such as CDB’s BMCs. Dependable and cost effective air
transportation services are vital to the development
of the tourism and hospitality industry, and play a
pivotal role in inter-regional travel. To support the deRegional Development Issues
velopment of their tourism industries, BMCs need reliable and increased air transportation services, particularly direct services from point-of-origin, at competitive
airfares. Some BMCs have direct services to key North
American and European airline gateways. Other BMCs
have connections to nearby countries that have direct
airline services to the major gateways in North America
and Europe. However, BMCs need assurances that these
major air transportation routes will not be disrupted
because of the potential impact on the tourism sector
and on their economies. In the past, route cutbacks by
major airlines out of the USA and Europe have severely
impacted on the tourism industry.
Over the years, some BMCs have sought to ensure ensure regular air services, and to safeguard it, established
national airlines. Major nationally owned airlines in the
BMCs include: BWIA, LIAT, Air Jamaica, Guyana Airways,
Cayman Airways and Bahamasair. These airlines were
promoted by their governments to ensure continued
growth in tourism and to reduce reliance on foreign
carriers. To reduce the fiscal risks involved and to obtain
access to private sector operating expertise and capital, some of these airlines were partially privatised in
the 1990s and early 2000s. Airlines partially privatised
during this period include: BWIA, LIAT and Air Jamaica.
However, having gone through a mixed range of ownership, these airlines have often required additional government financing. In fact, it has proven necessary for
the governments in the region to play an active role in
ensuring the continued viability of these airlines. Commencing in 2006 the sub-region witnessed the emergence of serious governmental efforts to rationalize
resources allocated to regional air transportation to reduce financial haemorrhage and enhance the quality of
services offered to the travelling public.
LIAT and Caribbean Star During the last 50 years LIAT
changed ownership from private to intergovernmental.
LIAT is central to inter-regional travel and the movement
of passengers from the larger international airports
within the sub-region to countries without facilities to
accommodate large aircraft. It is an important link for
those countries without night landing facilities, as well
as the transportation of goods produced within the
sub-region, particularly the Eastern Caribbean and Guyana. During that period LIAT has received substantial
government support, because it has mostly operated at
a loss in its 50 years of existence. Even though LIAT was
partially privatised in 1996, it amassed over $200 mn in
debt.
For many years, LIAT has been the foremost intra-regionCDB Annual Economic Review 2006
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al air carrier. However, it would be improper to attempt
to measure its contribution to the social and economic
development of the Caribbean by simply looking at the
bottom line. In Antigua and Barbuda, LIAT employs 457
persons and pays approximately $45.5 mn in wages and
salaries annually, which is a significant contribution to
the economy. Notwithstanding it contribution to the
Antigua and Barbuda economy, the Government of Antigua and Barbuda sees LIAT as an important element in
the regional development strategy and wants to make
sure that it becomes financially viable.
GAB together with the Governments of Barbados and
St. Vincent and the Grenadines are major shareholders in LIAT. The three governments own about 80% of
the shareholdings in LIAT. The investment by the three
governments in LIAT was essential for its continued survival. LIAT had nearly became insolvent in 2002, but the
governments of Antigua, Barbados, St. Vincent and the
Grenadines and Trinidad and Tobago provided additional funds tofacilitate the restructuring of its operations. In
2003, there were even plans to merge LIAT and BWIA,
but it did not take place. The three Governments have
a long established public policy regarding air transportation, and would like to see a quality intra-regional air
transportation system, at the best possible price for the
consumers, and an air transportation system in which
the governments have sufficient of influence and, or
control, so that the interest of the people of the region
can be adequately advanced.
In 2006, LIAT’s management presented the three main
shareholder governments with a report of the airline’s
performance. LIAT’s management reported that the airline urgently required additional financing of EC$24 mn,
or US$8.8 mn. In July 2006, it was announced that LIAT
would receive US$20 mn from GAB. With this cash injection, GAB would have strengthened its financial interest in the airline, making it the largest shareholder. The
Government of Venezuela was expected to provide GAB
with US$20 mn in a mixture of grants and loans, which
would be used to allow LIAT to continue to be the foremost intra-regional air carrier, as well as to strengthen
confidence in its finances.
The launching of Caribbean Star in 2000 intensified the
crisis in regional air transportation. Both airlines were
competing for a minuscule market, causing load factors
on overlapping routes to decline to approximately 30
– 40%. This development created further drains on the
treausuries of the participating governments and the
private shareholder/owner of Caribbean Star.
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CDB Annual Economic Review 2006
The obvious solution to to the difficulty was a rationalisation of resources allocated to the provision of interregional transport. Efforts leading to rationalisation
are expected to result in the development of a merged
airline employing the assets of LIAT and Caribbean Star.
The planned merger should conduce to higher load factors, eliminate wastage, minimize the drain on the participating governments coffers, and offer a better quality service to the public
BWIA Commencing in 1939 BWIA was the main air link
with the sub-region and the international community. The ownership of the airline underwent a series of
changes during its existene. At the commencement of
operations it was owned by a foreign company until it
was acquired by the GOTT in the early 1960s. In 1994
the arline was partially privatized, and later a consortium of foreign and regional investors held majority
control. For most of its existence it was unprofitable.
Subsequent to the terrorists attacks on the US Trade
Centre in 2001, and the crisis that was created in the airline industry BWIA went into a rapid downward spiral
amassing huge losses. GOTT was the sole shareholder
that provided financial assistance during the period of
financial crisis and eventually assumed majority control.
In spite of the massive financial support provided to
BWIA by GOTT the airline was bankrupt by 2003.
After regaining majority control of BWIA, GOTT established a taskforce with a mandate to evaluate three
options for the future of the airline and to make recommendations to a ministerial committee by April 30,
2005 as to an appropriate course of action. The courses
of action to be considered by the taskforce were: closure of BWIA with no replacement by a state-owned air
transport company; closure of BWIA with the simultaneous or otherwise establishment of a new air transportation company, which would be wholly or partially
State-owned; and closure of BWIA and, in its place, a restructured BWIA (2005) Limited.
The taskforce found that BWIA was never appropriately
capitalised, even though GOTT had provided over $120
mn over the last 5 years to maintain solvency. Over that
period BWIA had accumulated over $150 mn in losses
and many of its routes were unprofitable. In fact, since
it started BWIA only posted profits in 1999 and 2000.
Because of the accumulated losses, BWIA’s financial resources were limited, and this resulted in some of the
leased aircrafts being repossessed. In addition, BWIA
had failed to invest in new infrastructure and systems,
which placed it at a competitive disadvantage to its
competitors.
Regional Development Issues
After evaluating the options, the taskforce concluded
that BWIA should be restructured. However, this should
be contingent on the following conditions being satisfied: a capital injection of $250 mn plus severance payments; restoration of a maintenance capability; changes
in the work rules and cultural of the organisation; and in
terms of corporate governance, an independent Board
of Directors. GOTT added a further condition, that the
airline be privatised as soon as it was feasible.
GOTT agreed to the taskforce’s recommendations and
a new Board of Directors was appointed to restructure
BWIA. However, the new Board of Dircetors were unable
to settle collective agreements with the labour unions
within the parameters of the reorganisation plan. Because of this impasse with the Trade Unions, the Board
of Directors recommended the closure of BWIA and
the formation of a new airline. The new airline was to
be called Caribbean Airlines, and would be adequately capitalised, with a motivated workforce and robust
maintenance and technical capabilities.
GOTT is committed to invest $360 mn in Caribbean Airlines, in line with the original estimate of $250 mn plus
severance. Of this investment, only $85 mn will be for the
benefit of Caribbean Airlines, because the balance will
be used to close BWIA in an orderly fashion and settle
all suppliers, debt and staff payments. In the meantime,
BWIA is expected to provide an uninterupted service
while management transitioned to Caribbean Airline,
which was expected to start regional and international
flights on January 1, 2007. Eligible BWIA employees were
Regional Development Issues
offered separation packages and were given the opportunity to to apply for positions with Caribbean Airlines.
When negotiations with BWIA’s four unions on settlement packages for its workforce of 1,700 are completed,
GOTT will release US$250 mn to Caribbean Airlines. The
new airline will start with a staff of less than 700 persons
and with a substantially lower cost base than its predecessor.
Caribbean Airlines will be rooted in Trinidad and Tobago
and the Caribbean, but its outlook will be international.
It will develop an intra-Caribbean network, which will
mean extending its operations in Antigua and Barbados
and expanding its operations in Puerto Rico. As a result
of these actions, Caribbean Airlines will compete with
the merged LIAT-Caribbean Star in providing interconnecting flights around the entire Caribbean region.
The Board of Caribbean Airline held discussions in late
2006 with the Prime Ministers of Trinidad and Tobago,
St. Vincent and the Grenadines, Antigua and Barbuda,
and the Deputy Prime Minister of Barbados on the role
that Caribbean Airline can play in regional air travel.
These discussions are ongoing even though LIAT and
Caribbean Star agreed to merge in early 2007. The rationalisation of air transport in the English-speaking
Caribbean is far from complete, however the merger of
LIAT and Caribbean Star, and the ongoing search by the
respective Heads of government to establish areas of
synergy between a restructured Caribbean Airlines and
the merger LIAT/Caribbean Star establish a framework
for creating a viable regional airline network.
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