CARIBBEAN-Regional countries urged to focus on rebuilding their fiscal policies.

MARRAKECH, Morocco, CMC – The International Monetary Fund (IMF) says Caribbean countries must now focus on their fiscal policies and prepare for a distant future, having weathered several severe economic shocks, including the coronavirus (COVID-19) pandemic.

IMF Western Hemisphere Director Rodrigo Valdes observed the Washington-based financial institution released its October 2023 Regional Economic Outlook for the Western Hemisphere under the rubric “Securing Low Inflation and Nurturing Potential Growth.”

“This report has a message for the Caribbean and Latin America in general, which is that the region has been very resilient to these very severe shocks. So, we managed to come out of those. And it’s time now to focus first on rebuilding the fiscal aspect of countries — lower debt, lower deficits, to have buffers in case something happens in the future, more certainly will happen,” Valdes said in an exclusive interview with the Caribbean Media Corporation (CMC).

“And the second thing is to work on structural reforms to grow more. So, the emergency is over. It’s time to raise our eyes to the more distant future and to prepare ourselves,” he said during the interview at the annual meetings of the IMF and the World Bank Group, which ends here on Saturday.

The report notes that after a stronger-than-expected recovery from the pandemic and continued resilience in early 2023, economic growth in Latin America and the Caribbean (LAC) is softening as the effect of tighter policies to combat inflation is taking hold, and the external environment is weakening.

Economic growth in the Caribbean was strong in 2022 but is moderating this year. Actual gross domestic product (GDP) growth in the region, excluding Guyana, firmed to an estimated 4.2 percent in 2022 as countries continued reopening after the COVID-19 lockdowns.

The Outlook said that in tourism-dependent countries, such as Antigua and Barbuda, Barbados, St. Lucia, Jamaica, and St. Kitts-Nevis, growth was driven by a rebound in tourism and, in some countries, vigorous construction activity.

At the same time, in commodity-exporting countries, including Trinidad and Tobago and Guyana, economic growth benefited from the favorable terms of trade associated with higher oil and gas prices.

“However, the tailwinds that supported growth in 2022 appear to be weakening, and growth in the region (excluding Guyana) is expected to moderate to 1.9 percent in 2023. Inflation rose sharply in 2021–2022 but is expected to moderate in almost all countries in 2023.

“Unemployment has declined relative to the rates observed during the pandemic, but it remains high for certain groups (for example, youth and female workers),” the report said.

Current account balances improved in 2022, boosted by the recovery in tourism-dependent countries and higher oil and gas prices in commodity-dependent countries. However, this was offset by increased import costs, for example, food and energy.

It said a critical risk for tourism-dependent countries is an economic slowdown in tourism-source countries.

“Moreover, countries reliant on citizenship-by-investment programs may see lower fiscal revenues amid greater international scrutiny.

“For commodity-exporting countries, a sharper-than-expected global slowdown could reduce demand for their exports.”

The report said crime and insecurity have become increasingly widespread in LAC, entailing social costs and significant adverse effects on productivity, capital accumulation, and economic growth.

It further said reducing poverty, which increased during COVID-19, should also remain a central element in the fight against crime.

Valdes told CMC that generally, when inflation recedes, interest rates will eventually come down, though faster in some countries and slower than others.

“And that will make access to credit cheaper, at the end of the day, and that’s how people will feel it,” he said, adding that while interest rates in the United States are expected to remain high for some time, “this is not something that applies directly to the Caribbean.”

The IMF Outlook comes less than a week after the outbreak of another conflict between Israel and conflict, which threatens to drive up community prices.

“It’s too soon to have a complete view of this, but certainly, it’s unfortunate what has happened and bad news for the economy. But I would stress that with just digesting the effect of this,” Valdes told CMC.

He said high unemployment remains a problem for many countries, including the LAC region.

“I would say that there are two issues that we have to be particularly careful about. One is labor market regulations. Sometimes there, because we try to protect too much one sector, you end up with another sector, youth employment, for example, being punished.”

Valdes told CMC that another thing is addressing the skill mismatches between what young people learn in school and what the labor market demands.

These mismatches require “particular and intended action by governments,” Valdes suggested that the governments could change the curriculum and demand that schools teach certain things.

“That requires coordination by someone. It’s not something that naturally will happen.”

At the same time, the report suggests that regional governments accelerate digitalization, for example, in providing public services.

Valdes acknowledged that this may mean a need for fewer workers.

“Well, those people will have the opportunity to do other things,” he said, adding that this is not a new debate.

“For centuries, people were worried that machines would substitute people, and we are ten times or 20 times richer than at that time. So it’s always possible to have new avenues where people can work.”

He said the world of services, for example, requires people, including in healthcare.

“So I wouldn’t be that worried about the effect of this digitalization in terms of work, but we need skills, as we mentioned before, to be the correct ones. And there are things that the advance in digitalization could help and could be a potentially handy way to have more revenue mobilization in countries.

“All the tax aspects get easier, or the part of avoiding that people do not pay what is their fair share also can be more controlled better.”

Several Caribbean countries have citizenship by investment programs, which Valdes said the IMF recognizes as an opportunity for countries to raise revenue.

Under the CBI, Caribbean countries provide citizenship to foreign investors in return for them making a substantial investment in the socio-economic development of the islands.

“We think we have to be careful. First, do not treat those as permanent revenue or income. Something you can use and take advantage of, but don’t treat it as if we’ll be forever with a country,” he told CMC.

“Therefore, how much you can spend on that and how to invest that money is important. And the second element is that, as always, we’re apprehensive that the legal aspects of all these are compliant, fully compliant, with anti-money laundering risks that could appear.”

He said that countries also have to guard against “people who could be against good practices … in terms of, for example, money laundering” enrolling in their programs, adding that “tax shifting” is also an issue.

Regarding poverty and poverty, Valdes said that compared to South and Central America, crime is less of a problem in the Caribbean, even though it is a challenge in some countries.

“And we find that that produces less economic activity, less growth,” the IMF official said, adding the IMF is not an expert on crime reduction and draws on the work of the Inter-American Development Bank and the World Bank.

“But we see that a more equivalent society with more opportunities is good to avoid part of them going into crime.

“Now, this requires a lot of cross-country coordination because some groups operate across countries. And that is, if you do it alone, this battle against crime is very different if you do it in a group of countries,” Valdez told CMC.