Increased challenges likely as commodity prices soften – Finance Minister

Dec 02, 2015 News

---

There are subtle global events that have the potential to negatively impact the economies of the Caribbean Region. And Finance Minister Winston Jordan asserts that in the challenging international economic environment, the outlook

for CARICOM is mixed.
Jordan said recently that the major forces that will drive the performance of the region include commodity price trends, a stronger US economy and related exchange and interest rate dynamics.
The Finance Minister said that given the state of the world economy at this junction, “Commodity-based producers, including natural resources-based producers such as Guyana, Suriname and Trinidad and Tobago, are expected to face increased challenges as commodity prices soften while the services-based economies rebound based on improved tourism outturns and lower fuel costs.”
He added, “The average rate of economic growth in the region improved from 1.9 per cent in 2013 to 2.1 per cent in 2014. This was driven mainly by better tourism outturns in all service-dependent economies where the average growth improved from 1.3 per cent to 1.8 percent in this period.”
Jordan said that how  long these  service  dependent economies  will continue  to turn  positive  growth is  unsure,  given the recent attacks  and threats  by the correspondent banks  to  sever or curtail services  to the small  financial  institutions  in our region.
He said that there is a need for researchers to now come up with a mechanism or recommendations that will allow the region to still enjoy continued access to the markets of the developed countries while ensuring that the banks will not be adversely affected.
The Finance Minister said that correspondent banking is a business and not a service. The Caribbean Centre for Money and Finance (CCMF) is now given the challenge to see how best the region can continue to be productive business partners with foreign correspondents.
He said that from  every  challenge  is some  opportunity,  and it  is  for the  CCMF to  find the opportunities  out  of the recent challenges to the survival of the financial services sector in the region.
He said that the commodity-producing economies on the other hand recorded weaker growth of 2.5 percent in 2014, down from the 3.2 percent achieved in 2013, partly because of the drastic drop in commodity prices in the latter part of 2014.
“We in Guyana have not been spared the backwash of weakening global economic performance. For the first time in recent memory, the six pillars that have been the foundation of the economy’s upbringing, namely sugar, rice, bauxite, gold, diamonds and timber have all suffered major setbacks. Even a seventh pillar, remittances, which account for upwards of 25 percent of GDP, have also recorded decline,” the Minister said.
“Remittances are critically important for poverty reduction across the region and every effort must be made to ensure that the region continues to have access to that flow. The central  bank governors  met recently, and I hope they paid some attention to the  impact  of  US  legislation  on remittance companies and  devise ways and means to ensure continued  access, supported  by  stringent regional  regulation and  supervision.”
The Finance Minister said that one of the most intractable problems at the moment lies in the weakness of external accounts. He said that the region’s average performance in this area deteriorated, with the average deficit on the current account increasing from 8.6 percent of Gross Domestic Product (GDP) to 9.2 percent of GDP between 2013 and 2014.
“In fact, only Trinidad and Tobago recorded a surplus of 4.8 percent of GDP in 2014, but even in her case, the performance had deteriorated from a surplus of seven percent of GDP in 2013.
“In all other countries, deficits were recorded in 2014 but the tourism-based economies of Jamaica, Barbados and the Eastern Caribbean Currency Union (ECCU) were able to reduce their deficits relative to 2013.”
Jordan said that the obvious solution to this mostly deteriorated performance is persistent and sustained growth of the region’s economies while steadily reducing or managing macroeconomic and financial vulnerabilities.
He noted that the International Monetary Fund (IMF) estimates that the region will grow by approximately 2.2 percent in 2015, improving to 2.4 percent in 2016. This marginal improvement, the Finance Minister said, is unlikely to be reflected in commodity producing countries, the outlook of which is for generally slower growth relative to service-based economies.
Nevertheless, he said that low commodity prices and an improving US economy implies better growth prospects for most CARICOM countries. He said, too, that there are still significant problems in terms of fiscal accounts and debt sustainability.
The Finance Minister added that an important area for action, therefore, is the strengthening of the fiscal accounts which is crucial to rebalancing the external accounts. He expressed that service-based economies should use lower commodity prices, in particular the very low fuel prices, to accelerate the fiscal consolidation process, with a view to improving debt sustainability.
Jordan said that although commodity producers may have lower debt burdens, lower commodity prices require a disciplined policy framework to shore up revenues and prevent similar sustainability issues from developing.
He said that the fiscal consolidation that this implies in some cases requires increasing the efficiency of government expenditure programmes to weed out waste, without compromising the level of services provided to citizens and businesses.
In other cases, the Finance Minister said that it requires significant adjustment of expenditure priorities and enhanced revenue collection so as to increase the fiscal space for undertaking growth-inducing projects.
Additionally, Jordan said that stronger macro-prudential frameworks are necessary to remove the major drag on growth implied by high levels of non-performing loans.
“These policies are necessary, but not sufficient conditions for the resumption of strong sustainable growth. It also requires an improvement in competitiveness which implies a range of actions in connected areas, including the improvement of the business environment, increasing labour productivity, and improving the quality of public infrastructure.”
“The region also needs to strengthen the legal and regulatory frameworks for financial risk assessment and mitigation to deal with any financial vulnerability which can threaten the resumption of sustainable growth in the Caribbean,” he added.

---

---