Challenges for the Caribbean: Low Growth and High Debt Jodi Scarlata Western Hemisphere Department Views expressed are those of the speaker alone and should not be reported as representing the official position of the International Monetary Fund.

Caribbean countries are among the most indebted in the world, …

… and the rising debt ratio has taken its toll on the real economy, …

… as the recovery in Caribbean, especially the tourism-dependent ones, lagged behind.

The downturn in growth has been protracted in most of the Caribbean countries, …

… reflecting a combination of unfavorable external conditions and structural bottlenecks.

Countries have attempted expansionary fiscal policies to support the economy, …

… which resulted in higher primary spending and debt service burden.

The combination of persistent fiscal deficits and low growth has led to the debt accumulation, …

… and many forced debt restructurings.

Macroeconomic Sustainability and Growth A well designed fiscal consolidation can support higher long term growth. High debt burdens crowd out private sector growth by restricting the availability of financing and undermining confidence in macroeconomic policy. International evidence suggests that expenditure based consolidation has had more success. However, where the adjustment need is large as in many Caribbean countries, successful consolidation will require both revenue and expenditure measures. Given the relatively large size of the public sector in many Caribbean countries, spending restraint (even if phased in more gradually) should play a major role in adjustment, with revenue measures (e.g., broaden tax base and lower rates) complementing efforts. Fiscal rules would help sustain consolidation gains by increasing discipline and the credibility of policy. Broad political consensus and public support would enhance the chances of long lasting successful consolidation.

Private Sector Development: Some Key Channels Establish a private sector development strategy to enhance the role of the private sector in the economy. Reduce skills mismatch through curriculum modernization, increased vocational and in-house training by firms.. Review labor market restrictions to determine whether they reduce the response of employment to growth in economic activity. Regulatory burden on business should be alleviated

A strong growth agenda is critical for the Caribbean Growth is essential to address fiscal, external, and financial weaknesses Measures to restore competitiveness would help boost growth…private sector led growth: Rein in cost pressures by reducing labor market rigidities, addressing infrastructure bottlenecks, and restraining public expenditure Improve the business environment to facilitate trade and investment Strengthen laws and institutions to improve governance, including in financial regulation and supervision