Economies dependent on tourism under threat

International Monetary Fund (IMF) officials are advising Barbados and other tourism-dependent Caribbean economies that their performance is being threatened by natural disasters and an economic slowdown in the countries where they source visitors.

The region also “remains exposed to commodity price shocks, which could see a return of inflationary pressures”, experts in the IMF’s Western Hemisphere Department warned in their latest Regional Economic Outlook.

They flagged these “downside risks” as Rodrigo Valdes, director of Western Hemisphere Department observed that the Caribbean was losing noticeable amounts of their gross domestic product (GDP) each year, while deputy director Ana Corbacho stressed the need for Barbados and its neighbours to “integrate better mitigation and adaptation strategies in public investment plans”.

Caribbean economies were in focus as the IMF launched its latest Western Hemisphere Regional Economic Outlook under the theme The Caribbean: Fostering Higher, Sustainable, And More Inclusive Growth during the annual meetings in Washington DC.

The region’s economic prospects were further outlined by Valdes and Corbacho during a press briefing which discussed the outlook.

“Economic momentum in the Caribbean slowed in 2023 compared to 2022. Real GDP growth in the region, excluding Guyana, is estimated to have been 1.4 per cent in 2023, declining from 4.2 per cent in 2022,” the report stated.

“In tourism-dependent countries, tourism growth slowed as tourist arrivals approached pre-pandemic levels, partially supported by efforts to improve connectivity and expand hotel capacity.

“In commodity-exporting countries, headwinds in the energy sector were offset by strong performance in the non-energy sector, which benefited from policy support.”

IMF officials also reported that “inflation moderated significantly in 2023 to 2024 compared to 2021 to 2022 and has recently returned to prepandemic levels, mainly driven by global factors, including lower commodity prices and the reversal of supply-chain disruptions”.

“In Haiti, however, the supply-side shock caused by the security crisis has fed inflation pressures since February 2024. The region (excluding Guyana) is projected to grow 1.1 per cent in 2024 and 2.2 per cent in 2025, while inflation is expected to remain low,” they added.

The Western Hemisphere Department team sees challenges on the horizon, asserting that “risks to economic growth remain tilted to the downside”.

Create uncertainty

“In addition to natural disasters, a key risk for tourism-dependent countries is an economic slowdown in tourism-source countries,” the report outlined.

“Countries reliant on citizenship-byinvestment programmes may see lower fiscal revenues – which have supported spending and activity in recent years – amid greater international scrutiny. For commodity-exporting countries, commodity price volatility and a global slowdown could create uncertainty in export demand.”

It continued: “However, new energy projects and structural reforms under discussion provide an upside potential over the medium term. The region remains exposed to commodity price shocks, which could see a return of inflationary pressures.

“The region also remains highly vulnerable to climate change and natural disasters, as powerfully demonstrated by Hurricane Beryl, which caused fatalities and extensive physical destruction in early July, particularly in Grenada and St Vincent and the Grenadines (and to a lesser extent in Barbados and Jamaica).”

The IMF said that “while a detailed assessment of the full scale of damages is still ongoing, initial reports indicate that damages and losses for the region may well exceed US$500 billion”.

Corbacho reinforced the concern about the Caribbean’s high vulnerability to climate change and related natural disasters.

“Certainly, the Caribbean region is very vulnerable to climate change shocks. And we are concerned that the patterns of these shocks may be changing, becoming more severe and more frequent, which certainly requires more action on the government side and the multilateral community to support Caribbean economies,” she said.

“In particular on policy measures, what we have emphasized in our dialogue is the need to integrate better mitigation and adaptation strategies in public investment plans. Also fostering more active participation of private finance in increasing investment for climate resilience, as well as reducing the consumption of fuels through electrification.

“An upside for the Caribbean is the green energy transition. It could certainly give countries a chance to enhance resilience by investing in renewable energies, and through that, boosting competitiveness and lower exposure to climate change shocks,” she noted.

In terms of how the green transition could be financed, the report said that “mobilising private climate financing and drawing on official financing, including the IMF’s Resilience and Sustainability Facility – as Barbados and Jamaica have done – can help address external financing needs by catalysing additional funding, including from the private sector”.

The economic outlook report said that despite the progress made, a key policy priority for the Caribbean “is to continue building fiscal buffers while protecting the most vulnerable”.

“Government debt-to-GDP ratios are projected to continue declining in 2024 in most countries, mainly supported by economic growth and primary surpluses in some countries,” the IMF team said.

“But in many countries, debt remains above the already high 2019 levels, averaging in these countries 74 per cent of GDP in 2023. Mobilising revenue and enhancing spending efficiency are crucial for debt sustainability.”

Valdes said Caribbean economies needed to “face reality” in relation to their economic and fiscal situation, and he believed “they are doing it”.

“There’s a striking number. Countries in the Caribbean lose 2.5 per cent of GDP in capital per year, on average. It does not happen every year, but every ten years you can have a 25 per cent loss. So, you have to be prepared for that. And that means that fiscal policy has to be geared towards that,” she recommended.

“This is a multilayer system. You have to be careful with investment. Investment has to be more resilient. You have to work in the insurance side, in contingency bonds, for example. So, there is a lot to do. Some countries have been very good on that. Let me take the case of Jamaica and the last hurricane. They had some possibilities to use contingencies for that case.”

Remained stagnant

Such arrangements were also flagged in the IMF report which pointed out that “the region’s subdued mediumterm growth outlook is insufficient to materially reduce public debt ratios and support income convergence”.

“Caribbean per capita income levels have remained stagnant at about 40 per cent of the United States level since the turn of the century. Evidence indicates that low aggregate productivity growth and insufficient human capital largely explain this low potential growth,” it says.

“Key impediments to productivity growth include the inefficient allocation of productive resources – in both the goods and services sectors – and structural obstacles to firm-level productivity, such as regulatory burdens and the lack of financing.”

Valdes also said it was important for the IMF to work with other institutions in the region for the benefit of countries facing challenges.

“The reality is that we have been working for years with other partners in terms of regional arrangements. We have development banks in the region, the [Inter American Development Bank], we have CAF, we have FLAR Latin American Reserve Fund as another arrangement that lends money to central banks,” he stated.

“So perhaps the issue here is not whether we have these new institutions, but how to coordinate well. We are convinced that the more coordination, the less fragmentation, that everybody works together is better. Nobody needs the monopoly of this, but we need to work together.”

He gave this assessment as the economic outlook report observed that a major priority for the Caribbean “is to achieve higher and more inclusive growth”.

“Boosting growth and inclusion requires sound, credible, and sustainable macroeconomic policies to strengthen human capital and measures to address the impediments to productivity growth,” the report suggested.

“Specifically, this includes improving resource allocation, expanding financial access, maintaining a sound and stable financial sector with adequate supervision and regulation, addressing structural and youth unemployment, improving the efficiency of government services, and fostering integration within and outside the region in transportation and trade.”

IMF representatives said these objectives could be achieved by implementing product market reforms; centralised credit systems and financial sector reforms to increase competition; labour market reforms, education, and training programmes; and developing digital infrastructure, streamlining business registration and tax administration. (SC)

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