Another Lesson from the COVID-19 Pandemic: Fiscal Buffers are Essential
- Exogenous shocks, such as the current pandemic, can lead to dramatic reversals in the socio-economic fortunes of the people of the Caribbean with far-reaching consequences.
- Fiscal buffers are an essential part of the resilience toolkit of Caribbean countries.
- Vulnerability must be explicitly considered by the international financial institutions if they are to craft timely and effective responses to the needs of Caribbean economies.
Rainy days will come. They always do.
In our neighbourhood called the Caribbean, the “storms” keep coming.
Consider the past two decades in the Eastern Caribbean Currency Union (ECCU): 9/11 attacks (2001); Global Financial Crisis (2007-2008) which then morphed into the Great Recession (2009-11); Hurricane Tomas (2009); Tropical Storm Erika (2015); Hurricanes Irma and Maria (2017); COVID-19 pandemic (2020-2021); and the eruption of La Soufrière Volcano (2021). The keen observer would immediately notice that no mention was made of unseasonal and extreme weather events such as the Christmas Floods (2013). The GDP impact of the foregoing events range from 5 per cent to 225 per cent.
Bottom line: the “storms” or shocks keep coming.
One of the enduring lessons of the current pandemic is the criticality of fiscal buffers. Indeed, for the small hyper-open and vulnerable economies of the Caribbean, fiscal buffers are an indispensable part of our region’s resilience toolkit. Furthermore, it is my general observation that countries with fiscal buffers have fared somewhat better than those without. Here, I refer not to the containment of the COVID-19 pandemic per se but to the response of Governments in respect of care and relief packages to cushion the effects of the pandemic on suffering individuals, households and businesses. Without these buffers, the situation, though still difficult, would be far worse.
The Prime Minister of Grenada, Dr Keith Mitchell, recently stated that the relief provided by his Government to vulnerable Grenadians was made possible because of fiscal responsibility over the past few years - a confirmation that fiscal buffers are necessary for quick and compassionate responses.
The Impact of the Pandemic on the ECCU
The International Monetary Fund (IMF) revised estimates indicate that the global economy declined by 3.3 per cent in 2020, due to the impact of the coronavirus. As a consequence of the pandemic, the ECCU economies shrank by 15 per cent in 2020, the largest growth shock on record (Figure 1). A modest recovery is projected in 2021.
Concomitant with declining economic activity, fiscal and debt indicators in the Currency Union have deteriorated. Estimates for the ECCU show deficits of $1.5 billion and $1.0 billion in 2020 and 2021, respectively, compared with deficits of $0.8 billion in 2019 and $0.5 billion in 2018. The anticipated financing gap for 2021 is about $2.1 billion. This trend of widening fiscal deficits and rising debt, is expected to continue into the medium term (2-3 years), as countries continue to implement policies to protect their citizens and until Tourism recovers (Figure 2).
The ECCU Debt to GDP ratio has jumped from 67.2 per cent at the end of 2019 to 85.6 per cent at the end of 2020 - an 18.4 percentage-point increase - thereby wiping out all the hard-earned gains of the past eight years (Figure 3).
Of note, ECCU Governments contracted an additional $1 billion of debt in 2020. Much of this debt helped to plug the massive financing gaps occasioned by the pandemic. It ought to be recalled that government revenues plummeted by as much as 50 per cent in some countries. This precipitous decline reflects the 65.4 per cent drop in visitor expenditure to $2.4 billion in 2020 from $6.8 billion in 2019 (Figure 4). Additionally, it reflects the fall in demand for economic citizenship, the dominant driver of non-tax revenue in some countries.
At present, the IMF projects that Tourism in the Caribbean will not return to pre-pandemic levels before 2024. In the meantime, the pandemic is leaving a trail of death and destruction in its wake. In the ECCU, we have already lost 117 persons to the pandemic as at 27 April 2021. I extend my condolences to all who have lost loved ones, at home and in the diaspora.
In a relative sense, the Caribbean has done well to minimise the loss of life, however, the socio-economic destruction in respect of livelihoods and quality of life (inclusive of mental health) is staggering. Many businesses have collapsed and some cannot be resuscitated. These business failures have implications for employment, government revenue and financial stability among other things. The current situation has left some commentators to suggest that our region could suffer a “lost decade”.
On account of this adverse shock, the Monetary Council (ECCU Finance Ministers) agreed in February 2021 to revise the fiscal anchor, which is the Debt-to-GDP ratio of 60 per cent by 2030, to 2035.
Some Progress on Fiscal Resilience Frameworks
The ECCB has long advocated, to member countries, the necessity for fiscal resilience frameworks - referred to by some as fiscal rules or fiscal responsibility legislation. Frankly spoken, these frameworks cannot await the good times because the “storms” keep coming. These frameworks now exist in Jamaica (2013), Grenada (2015), Barbados (2018) and The Bahamas (2019). Anguilla, an overseas UK territory, also has a similar mechanism.
The ECCB is heartened by recent efforts to enact a similar framework in Saint Lucia (2020). In Dominica, work is progressing for possible enactment in 2021. In the case of Saint Vincent and the Grenadines, the Government tabled a fiscal covenant in Parliament in 2019.
It should be noted that embedded in most of these frameworks is an escape clause or derogation clause to address major shocks. As a consequence, several countries - including Grenada and The Bahamas - have invoked these clauses to facilitate their responses to the pandemic. These actions prove, contrary to the concerns of some, that fiscal resilience frameworks do offer governments flexibility to treat with major shocks.
At present, some ECCU Governments have buffers like sinking funds, Contingencies Funds, Citizenship by Investment (CBI) funds, parametric insurance provided by CCRIF SPC or the CAT DDO offered by the World Bank, which Saint Vincent and the Grenadines recently drew down following the eruption of the La Soufrière Volcano. The foregoing tools provide a glimpse into the toolkit of fiscal resilience frameworks. Alas, the size of these tools is severely constrained by fiscal space. This constraint takes us back to the criticality of governments saving for rainy days through the enactment of fiscal resilience frameworks.
The Imperative for Adoption of a Global Vulnerability Index
As Honourable Camillo Gonsalves, Finance Minister of Saint Vincent and the Grenadines so poignantly articulated recently, there are indices for many things, including a Happiness Index, yet the international community has failed to adopt a Vulnerability Index.
It ought to be recalled that the Commonwealth Secretariat pioneered work on a Vulnerability Index as far back as 1989. The failure by the international financial institutions to adopt a Global Vulnerability Index means they are stuck with the analytical absurdity of relying on per capita income to determine access to concessional financing for middle income countries. According to the Prime Minister of Barbados, Honourable Mia Amor Mottley, middle income countries risk being “pauperised” without access to concessional financing.
The Need for Disaster-linked Debt Clauses
Since 2016, the ECCB has consistently advocated for the adoption of disaster-linked clauses in all debt contracts of Small States. The IMF sometimes refers to these as state contingent debt instruments.
I have argued that, similar to the way in which banks have extended loan deferral programmes or moratoria to borrowers, sovereigns such as our Small States require a similar facility in the event of major shocks. Grenada pioneered this in its debt restructurings in 2014 and 2015 with what is popularly referred to as the hurricane clause.
Following ECCB’s call, in writing, to the Heads of the IMF and the World Bank in 2017 - a call fully endorsed by the Council of Finance and Planning (COFAP) and strongly supported by Canada and eventually the G7 - the International Capital Markets Association in collaboration with Clifford Chance (an international law firm), prepared and released a term sheet in late 2018.
Call to Action
In sum, the necessity for fiscal buffers cannot be denied or overemphasized. They are hugely important for swift recovery from shocks and they go a long way to lessen the hardship on our people and reduce permanent damage to our economies (scarring).
As our region seeks to build resilience, the following actions are necessary and urgent:
- Enactment of fiscal resilience frameworks in all Caribbean countries;
- Adoption of a Global Vulnerability Index by the international community; and
- Embedding of disaster-linked clauses in the debt contracts of Small States.
The pandemic offers us a painful object lesson. Let us take action now.
The ECCB acknowledges the contribution of Mrs Beverley Labadie, Deputy Director (Ag.), Research Department, in the preparation of content for this blog.
About the Author
Timothy N.J. Antoine has been the Governor of the ECCB since February 2016. He is passionate about the socio-economic transformation of the Eastern Caribbean Currency Union (ECCU) and regards it as the pathway to shared prosperity for the people of the ECCU.
About the Eastern Caribbean Central Bank
The Eastern Caribbean Central Bank (ECCB) was established in October 1983. The ECCB is the Monetary Authority for: Anguilla, Antigua and Barbuda, Commonwealth of Dominica, Grenada, Montserrat, Saint Christopher (St Kitts) and Nevis, Saint Lucia and Saint Vincent and the Grenadines.