Facing financial challenges in the Caribbean’s smaller states

Jul 26, 2009 Features / Columnists, Ronald Sanders

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By Sir Ronald sanders

As the member countries of the Organisation of Eastern Caribbean States (OECS) work toward the establishment of an Economic Union amongst themselves amid grave economic circumstances, all of them should even now be considering initiatives which would cut costs while making policy making and implementation more cohesive.
Now that’s a long sentence to swallow and its precise meaning may be unclear. So, spelling out the concept is important for clarity.
Starting with the economic circumstances of these countries, six of them are independent nations; the other member is Montserrat which remains a British Colony. The six are among the most heavily indebted nations, per capita, in the world. Their ratio of debt to gross domestic product ranges from between 95% to 120%. This means that, after servicing debt, they don’t have a great deal left over to play with. The space for policy options, therefore, is limited if not non-existent.

Five of them have sought assistance from programmes introduced by the International Monetary Fund (IMF) to help countries cope with the consequences of the present difficult global financial crisis.
St Lucia, St Vincent and the Grenadines and Dominica have each signed up to the IMF’s Exogenous Shocks Facility, St Kitts-Nevis has arrangements under the IMF’s Emergency Assistance for Natural Disasters progamme, and Grenada is receiving help to address poverty as part of the IMF’s Poverty Reduction Strategy Papers. The Minister of Finance of the sixth OECS member country, Antigua and Barbuda, has indicated that his government will also soon have to approach the IMF for help given the economic difficulties being faced.
Each of these countries may have to go beyond the present IMF windows from which some are getting assistance into a full IMF programme. They have been talking of doing so collectively, and the IMF should accommodate such an approach. While each country will have needs that differ in some ways, and the measures to address them would also be different, the fundamental problems are not dissimilar and an overall strategy with national components could be devised.

The IMF should also recognise that, with the best will in the world, the OECS member countries, individually, lack the capacity to negotiate terms effectively. A joint team drawn from the best of each of the countries, supported by national ministries of finance, would make for a more effective negotiation and an outcome that the IMF and the countries could stand behind.
This is just one example of what the member countries of the OECS could do now ahead of the creation of their Economic Union which becomes increasingly imperative for each of them.
But there are other areas. A crucial one – and one which should be addressed urgently – is the setting-up two sets of joint regulators: a joint regulator for all banks, and a joint regulator for non-bank financial institutions such as insurance companies.

Recent events in the offshore banking sector in Antigua and Barbuda and St Vincent and the Grenadines, where the operations of offshore banks in both counties have led to allegations of Ponzi Schemes and investors being defrauded, suggest the need for more efficient regulation by drawing on the best talents and experience of the entire area to form a single, joint regulator.
The Eastern Caribbean Central (ECCB) already regulates the on-shore banking sector of the Eastern Caribbean Currency Union countries of which the OECS members are a part. A strengthened ECCB could be given the task of regulating the offshore banking sector as well. This would eliminate the present national regulation which ranges in individual countries from a statutory body under the control of the Minister of Finance to regulation by the Minister alone.

In placing the regulation of all offshore banks in OECS countries under the ECCB would not only cut national costs, it would make for more credible and effective regulation of the offshore banking sector. Multi-national watchdog organisations, such as the Financial Action Task Force and the Organisation for Economic Cooperation and Development (OECD), would also be more comfortable with a joint regional regulator that has a longer arms-length relationship with institutions in individual countries. So, too, would commercial banks internationally which provide correspondent relationships for banks in the OECS.
The British international publication, The Economist, recently reported that, in light of the financial crisis which occurred in the United States and the United Kingdom because of weak regulation of banks, “Britain’s Conservative Party, likely to form the next government, wants the Bank of England to be in charge not just of interest rates, but also the two big tasks of regulation: guarding the overall system’s stability and the “micro” supervision of individual firms”. So the idea is not out of sync with initiatives in other parts of the world.

The OECS should also consider a joint regulator for non-bank financial institutions. Effective regulation of this sector is lacking throughout the region. But, cross-border transactions involving two Insurance companies, CLICO and British American, that have hurt some investors and are likely to cause more problems in the coming months, also support the need for such a joint regulator.
When the OECS was formed in 1981, joint overseas representation was one of the objectives it wished to achieve. As it turned out, it has only achieved it in Canada where the member countries have a joint mission and, in a tenuous way, at the World Trade Organisation (WTO) in Geneva. Yet, individual overseas missions have been a high cost in the implementation of the foreign policy of member states even though, with few exceptions, more has been achieved in the international community when Caribbean countries have acted collectively than when they have acted alone.

A strong joint mission at the WTO and in Brussels, where the headquarters of the European Commission is located, is becoming more important every day for the members of the OECS as rules on trade and investment are created that directly affect the livelihood of these countries. Individual small countries with very limited resources, lack the capacity for effectively representation; they have a better chance drawing on their collective pool.
So, even as the small member countries of the OECS look toward the formation of an Economic Union, there are practical steps that could be taken now to cut costs and establish effective machinery to address some of their challenges.
(The writer is a Consultant and former Caribbean diplomat)
Responses to: ronaldsanders29@hotmail.com

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