THE DEBT ISSUE AMONG MIDDLE INCOME COUNTRIES: HOW TO RESOLVE THE CHALLENGES (WITH SPECIAL REFERENCE TO THE CARIBBEAN)

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1 THE DEBT ISSUE AMONG MIDDLE INCOME COUNTRIES: HOW TO RESOLVE THE CHALLENGES (WITH SPECIAL REFERENCE TO THE CARIBBEAN) E V E R T O N M C F A R L A N E M I N I S T R Y O F F I N A N C E & P L A N N I N G, J A M A I C A * * D I S C L A I M E R : V I E W S E X P R E S S E D A R E T H E A U T H O R S A N D S H O U L D N O T B E C O N S T R U E D A S R E P R E S E N T I N G T H E P O S I T I O N O F T H E M I N I S T R Y O F F I N A N C E & P L A N N I N G, J A M A I C A

2 STRUCTURE Focus on Caribbean Countries The Nature of the Debt Issue The Root Causes of the Debt Issue Challenges to Resolving the Debt Issue 2

3 WHAT IS THE DEBT ISSUE? Persistently high levels of debt (relative to GDP), historically; and Challenges to debt sustainability, prospectively. Stylized facts: (Public Debt to GDP ratios, %): Threshold above which debt inhibits growth: 55 60% (proj) Antigua & Barbuda > 100 Belize N.A. Dominica >60 Grenada >100 Jamaica >100 St. Kitts & Nevis >60 Source: 2000 & (Robinson (2013)); Moore et al (2013); cited in The Commonwealth Small States Digest, Issue 3, 2013, p. 11 N.A.: Not Available 3

4 ROOT CAUSES OF THE DEBT ISSUE High Economic Vulnerability - Small size (openness; limited economies of scale ; remoteness) - Lack of economic and export diversification - Exposure t o exogenous shocks (eg. natural hazards) Poor Economic Governance Persistent primary fiscal deficits Contingent fiscal liabilities Inappropriate monetary/exchange rate management Source: Brugiglio (2013); Acevedo et al (2013); Medina & Otta (2008) 4

5 WHAT ARE THE CHALLENGES TO RESOLVING THE DEBT ISSUE? 1. Recurring and progressively severe exogenous shocks and inadequate insurance mechanisms 2. Continuing Trade Preference Erosion 3. Weak global growth and domestic demand conditions 4. Limited impact of Debt Restructurings and Relief 5. Weak Fiscal Institutions NB: It is arguable that Caribbean states and many other MIC s can do little about (1) & (2), even within the context of regional and multilateral negotiating groups 5

6 RE-STATING THE GROWTH AGENDA Macroeconomic stabilization (fiscal consolidation) Structural Reforms (tax reform; entitlement reform; property rights reform); competitiveness reforms energy costs, business entry and exit; finance reforms) Social Inclusion (SME support; social protection) Environmental resilience 6

7 ROLE OF DEBT RESTRUCTURING & RELIEF Limited impact of debt restructuring - Experience not good ( successful restructurings have not had permanent impact on debt to GDP ratios) - Scope for future restructurings limited for the experimenters - Depth of restructuring constrained by the composition of the debt Limited impact of debt relief - Debt for equity swaps not effective in reducing debt - Debt-write offs for some Caribbean countries but applies to only a very small portion of the public debt - Graduation form poor country status 7

8 ENHANCED FISCAL GOVERNANCE THE PRIMARY LEVER FOR CARIBBEAN (AND MIDDLE INCOME?) COUNTRIES Necessary for : increasing resilience to shocks; growth-supporting macroeconomic stabilization; permanent debt reduction. (NB: A small open economy without a reserve or internationally traded currency cannot pursue independent monetary /exchange rate policies under ANY exchange rate regime) Two dimensions of enhanced fiscal governance: - Fiscal Adjustment implementing (possibly large ) increases in primary surpluses - Fiscal Stabilization creating institutions to lock-in the gains of fiscal adjustment 8

9 RE-STATING THE CONTOURS OF SUCCESSFUL LARGE FISCAL ADJUSTMENTS Combination of tax and expenditure adjustments, with the burden of adjustment falling on expenditure reductions Tax enhancements focus on lowering average effective tax rates on highly taxed sectors, broadening the tax base (streamlining tax expenditures, and reducing evasion/avoidance, and strengthening tax administration capacity Expenditure reductions focus on reducing nonproductive expenditures, reform entitlement programs (social insurance and public pensions) Given the magnitude of adjustments required, renewed attention to be paid on increasing the efficiency and reach of social protection programs 9

10 FISCAL-STABILIZING INSTITUTIONS THE NEGLECTED CHILD? Increased transparency of fiscal decisionmaking Increased accountability for fiscal policymakers Enhanced capacity for oversight institutions Increased reliance on quantitative fiscal rules 10

11 KEY FEATURES OF CREDIBLE FISCAL RULES (THE JAMAICAN CASE) Rules based on easily understood, easily observable targets explicitly derived from a forward looking, medium/long-term debt sustainability objective Broad coverage of he public sector (to reduce fiscal illusion and hidden contingencies) Legislative authority (within limits of the constitutional tradition), with sanctions Multi-year Automatic correction mechanisms Narrowly circumscribed escape clause Parliamentary reporting and oversight 11

12 ROLE OF NON-GOVERNMENT AGENTS/DONORS/CREDITORS Public education Increased grant funding for structural reforms for fiscal consolidation (eg. competitiveness reforms) Increased low-cost funding for institutional and policy reforms for fiscal adjustment (pension reform; public sector employment reform) Increased low cost funding to support/complement market-based risk transfer and risk-sharing mechanisms (eg. catastrophe/flood insurance) contingent on recipient countries progress on disaster risk mitigation initiatives 12