An Agenda for Reduction and Sustainability

Public Sector Debt in the Caribbean: An Agenda for Reduction and Sustainability Caribbean Development Bank Wildey, St. Michael BB11000 Barbados, West Indies Wildey, St. Michael www.caribank.org Public Sector Debt In The Caribbean: An Agenda For Reduction And Sustainability i ©Caribbean Development Bank, 2013 ISBN: 978-976-8233-75-2 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording or otherwise without the prior permission of the publisher. Published by: Caribbean Development Bank Cover Design by: Unison Graphics Printed by: Caribbean Development Bank The views expressed in this book, as well as any errors of commission, or omission, are the sole responsibility of the authors, and do not necessarily reflect the opinion of the Caribbean Development Bank. ii Table of Contents TABLE OF ILLUSTRATIONS VI FOREWORD IX ACKNOWLEDGEMENTS X ABBREVIATIONS AND ACRONYMS XI EXECUTIVE SUMMARY 1 CHAPTER 1 : DEBT AND DEVELOPMENT – A Review of the Literature 13 INTRODUCTION 13 THE IMPACT OF DEBT ON GROWTH AND DEVELOPMENT 14 External Debt and Economic Growth 15 Domestic Debt and Economic Growth 18 The Relationship Between Debt and Development 19 TRANSMISSION CHANNELS FROM DEBT TO GROWTH AND DEVELOPMENT 20 Debt and the Fiscal Balance 21 Debt and the Financial Sector 21 Debt and Macroeconomic Policies and Institutions 23 Debt and Private Investors 24 CONCLUSION 25 CHAPTER 2 : THE CARIBBEAN DEBT EXPERIENCE, 2000-2010 27 INTRODUCTION 27 THE CONTEXT FOR DEBT 29 Fiscal Imbalances 29 External Shocks 31 Natural Disasters 32 THE CHANGING FACE OF DEBT IN THE REGION 35 Debt Restructuring 35 Pattern of External Borrowing 36 The Regional Government Securities Market 38 EVOLUTION OF PUBLIC DEBT IN THE CARIBBEAN 40 Non-Eastern Caribbean Currency Union Countries 40 Eastern Caribbean Currency Union Countries 48 The Overseas Territories 54 CONCLUSION 59 CHAPTER 3 : SOURCES – DECOMPOSING DEBT 61 INTRODUCTION 61 DEBT AND DEFICITS 61 DECOMPOSING DEBT ACCUMULATION 63 The Components 63 Results 65 iii KEY DRIVERS OF DEBT 69 Primary Balance 69 Interest 70 Events 71 DECOMPOSING NON-ACCUMULATION YEARS 72 CONCLUSION 72 CHAPTER 4 : CAUSES – INSTITUTIONS AND ORGANISATIONS 75 INTRODUCTION 75 THE ROLE OF INSTITUTIONS IN FISCAL AND DEBT MANAGEMENT 75 LEGISLATIVE FRAMEWORK FOR FISCAL MANAGEMENT 77 THE ROLE AND IMPACT OF FISCAL INSTITUTIONS 78 LEGISLATIVE FRAMEWORK FOR DEBT MANAGEMENT 81 THE ROLE AND IMPACT OF DEBT MANAGEMENT INSTITUTIONS 83 Institutional Structure 83 Management Strategy and Principles 87 The Quality of Public Financial Management 90 CONCLUSION 92 CHAPTER 5 : PROSPECTS – EXTRAPOLATING THE FUTURE 95 INTRODUCTION 95 METHODOLOGY 95 SCENARIO DESCRIPTIONS 96 THE BASELINE SCENARIO 97 Assumptions 97 Results 97 Sensitivity Analysis 98 LEAST RESISTANCE SCENARIO 100 DEFAULT SCENARIO 101 TARGET SCENARIO 102 CONCLUSION 103 CHAPTER 6 : SOLUTIONS – AN AGENDA FOR SUSTAINABILITY 105 INTRODUCTION 105 DEBT AND DEVELOPMENT IN THE CARIBBEAN: PRESENT, PROSPECTS AND PROBLEMS 105 Present: Have Caribbean Countries Crossed the Debt Overhang Threshold? 105 Prospects: Are Caribbean Countries on a Sustainable Debt Path? 106 Problems: What are the Challenges Associated with High Debt Levels? 106 THE COMPOSITION AND NATURE OF DEBT ACCUMULATION IN THE CARIBBEAN 107 Composition: From Whom are the Caribbean Governments Borrowing? 107 Debt Accumulation: Why are Caribbean Governments Borrowing so Much? 108 RECENT REMEDIAL ACTION IN HIGHLY-INDEBTED CARIBBEAN COUNTRIES 109 iv AN AGENDA FOR REFORM 109 Fiscal Management 110 Debt Management 112 Liability Management 114 Disaster Management 115 OTHER CONSIDERATIONS 116 The Default/Restructuring Option 116 The Role of Regional Cooperation 117 CONCLUSION 118 APPENDIX 1.1: SUMMARY OF THE EVIDENCE ON THE RELATIONSHIP BETWEEN DEBT AND ECONOMIC GROWTH 120 APPENDIX 1.2: THE FISCAL SUSTAINABILITY FINANCIAL STABILITY NEXUS – THE CASE OF THE EASTERN CARIBBEAN CURRENCY UNION 122 APPENDIX 2.1: DEBT RESTRUCTURING IN THE CARIBBEAN, 2000-2010 125 APPENDIX 2.2: THE HIGHLY INDEBTED POOR COUNTRY INITIATIVE: THE CASE OF GUYANA 129 APPENDIX 3.1: DEBT DECOMPOSITION FORMULATION 133 APPENDIX 4.1: PUBLIC FINANCIAL MANAGEMENT IN THE CAYMAN ISLANDS 135 APPENDIX 4.2: REVENUE REFORMS IN THE CARIBBEAN 141 APPENDIX 4.3: DEBT MANAGEMENT – THE CASE OF JAMAICA 152 APPENDIX 5.1 BASELINE SCENARIO ASSUMPTIONS – BY COUNTRY 160 APPENDIX 6.1: FISCAL LEGISLATION IN JAMAICA AND GUYANA 146 REFERENCES 163 v Table of Illustrations Table 1.1: Estimated Forgone Growth as a Result Of Exceeding .............................................. 17 Table 2.1: Caribbean Countries - Environmental Vulnerability ................................................. 33 Table 2.2: International Monetary Fund Emergency Assistance ................................................ 34 Table 2.3: Public Indebtedness and Environmental Vulnerability In The Caribbean as at 2010 ...................................................................................... 34 Table 2.4: Caribbean Countries: Debt Restructuring Agreements, 2000-2010 .......................... 35 Table 2.5: Rated Non-ECCU Market Access Countries ............................................................ 37 Table 2.6: Eastern Caribbean Currency Union – Number of Regional Governments’ Securities Market Auctions, 2002, 2005, 2011 .................................. 38 Table 2.7: Eastern Caribbean Currency Union - Value of Regional Governments’ Securities Market Issues, 2002, 2005, 2011 ............................................................. 39 Table 2.8: Composition of Total Public Debt By Market as at End-2010 .................................. 41 Table 2.9: Eastern Caribbean Currency Union Countries - Composition of Total Public Debt By Market as at End-2010............................................................ 49 Table 2.10: Overseas Territories – Composition of Total Public Debt By Market, 2010 ............ 55 Table 2.11: Rated Overseas Territories as at End-2006 And 2011 ............................................... 57 Table 3.1: Periods Of Sustained Debt Accumulation ................................................................. 65 Table 3.2: Decomposition of Debt Growth ................................................................................ 66 Table 3.3: Contribution To Changes In Debt, Average For Seven Countries ............................. 72 Table 4.1: World Bank Public Sector Management Index ......................................................... 91 Table 4.2: World Bank Economic Management Index .............................................................. 91 Table 5.1: Baseline Scenario ...................................................................................................... 98 Table 5.2: Sensitivity Analysis ................................................................................................... 99 Table 5.3: Least Resistance Scenario ....................................................................................... 101 Table 5.4: Default Scenario ...................................................................................................... 101 Table 5.5: Achieving A Debt/Gross Domestic Product Ratio of 60% ..................................... 102 vi Figures Figure 2.1: Debt/Gross Domestic Product, Middle-Income Countries, 2010 (%) ..................... 27 Figure 2.2: Caribbean Countries: Debt/Gross Domestic Product - 2012 (%) ............................ 28 Figure 2.3: Caribbean Countries – Debt/Gross Domestic Product, 2000, 2005 and 2012 (%) ........................................................................................ 29 Figure 2.4: Caribbean Countries: Public Sector Primary Balance as Share Of Gross Domestic Product, 2007, 2010 (%) ................................................ 30 Figure 2.5: Output Growth In The Caribbean – 1995-2004 (Average.), 2005 and 2010, (%) .............................................................................. 32 Figure 2.6: Public Debt-To-Gross Domestic Product Regional Sub-Groups as at End 2012, % ................................................................................ 40 Figure 2.7: Eastern Caribbean Currency Union Countries Public Debt-To-Gross Domestic Product, End-2012 (%) ................................................... 49 Figure 2.8: Overseas Territories – Debt/Gross Domestic Product 2012 (%) ............................. 55 Figure 2.9: Anguilla – Public Debt/Gross Domestic Product, 2000-2010 (%) .......................... 56 Figure 2.10: Montserrat – Public Debt-To-Gross Domestic Product, .......................................... 58 Figure 3.1: Central Government Debt/Gross Domestic Product Ratio, Average For Group Of Seven Indebted Caribbean Countries, 1992-2010 .............. 61 Figure 3.2: Fiscal Deficit / Gross Domestic Product Ratio, Average For Group Of Seven Indebted Caribbean Countries, 1992-2010 .............. 61 Figure 3.3: Debt/Gross Domestic Product, 1992-2010 .............................................................. 62 Figure 3.4: Contribution To Debt Growth, Belize, 1997-2004 .................................................. 66 Figure 3.5: Contribution To Debt Growth, Grenada, 2000-04 ................................................... 67 Figure 3.6: Contribution To Debt Growth, St. Kitts And Nevis, 1995-2004 ............................. 67 Figure 3.7: Contribution To Debt Growth, Antigua And Barbuda, 1997-2004 ........................

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