LIMITED LC/CAR/L.97 3 October 2006 ORIGINAL: ENGLISH ECONOMIC SURVEY OF THE CARIBBEAN 2005-2006 __________________ This document has been reproduced without formal editing. Table of contents Executive summary..........................................................................................................................1 I. Regional overview........................................................................................................................3 1. Sectoral performance ...............................................................................................4 2. The external sector performance............................................................................13 3. Fiscal policy in the Caribbean................................................................................19 4. Monetary policy.....................................................................................................29 5. International trade negotiations and economic integration....................................33 6. The economic outlook............................................................................................35 II. Analysis of selected topics.................................................................................................36 1. The behaviour of oil prices and its effect on Caribbean economies ......................37 2. The Cricket World Cup..........................................................................................53 3. Conclusion .............................................................................................................59 III. Country briefs ..........................................................................................................................61 Aruba…..............................................................................................................................62 The Bahamas......................................................................................................................67 Barbados ............................................................................................................................73 Belize.. ...............................................................................................................................79 Guyana ...............................................................................................................................84 Jamaica...............................................................................................................................91 Netherlands Antilles...........................................................................................................98 Member countries of the Organisation of Eastern Caribbean States (OECS) .................103 Puerto Rico.......................................................................................................................111 Suriname ..........................................................................................................................116 Trinidad and Tobago........................................................................................................123 Turks and Caicos Islands .................................................................................................130 1 Executive summary This survey examines the macroeconomic performance of selected countries of the Caribbean Development and Cooperation Committee (CDCC) for 2005 and their outlook for 20061. In 2005, the majority of Caribbean countries moderated their rate of growth with respect to the previous year, partly due to the adverse effects of external shocks, including natural disasters, and the sharp increase in the international price of oil. Turks and Caicos recorded the highest growth rate (12%) followed by Anguilla, Saint Lucia, Trinidad and Tobago, and St. Kitts and Nevis (7%). A second group of countries (Suriname, Antigua and Barbuda and Grenada) registered rates of growth ranging from 5% to 6%. The rest of the countries witnessed stagnation or a contraction of their economic activity. The pace of economic expansion was supported by mining, tourism and construction. The performance of mining responded to increases in productive capacity and improved terms of trade for major export commodities. Tourism benefited from higher levels of external demand, improvement in infrastructure and the steady increase in stay-over arrivals. The construction sector benefited from expansionary policies aimed at increasing aggregate demand, the rise in capital flows and the preparations related to the Cricket World Cup (2007). The Cricket World Cup is expected to have a significant impact on the host economies, and indirectly on the Caribbean region as a whole. Caribbean countries estimate that the event will boost growth through higher levels of activity and expenditure. In some countries, such as those of the Organisation of Eastern Caribbean States (OECS), the Cricket World Cup preparations have had a positive impact on this current year’s rate of growth. In particular the event will have important direct effects on the tourism and construction activities and induced (multiplier) effects in the rest of the economy. Throughout the region, countries adopted a conservative monetary stance in order to defend the parity of their currency. Rising interest rates on international capital markets, increasing fiscal deficits in some cases and the effects of rising oil prices on the current account and on inflation prompted the authorities to adopt this policy. The current account position deteriorated for all economies (-9% and –17% of GDP in 2004 and 2005) with the exception of Belize, Saint Lucia and Trinidad and Tobago. The latter was also the only country to record a surplus in its external accounts. The behaviour of the current account responded to the significant increase in the energy bill, higher food prices and the rise in the demand for construction materials. Monetary policy objectives were not always in consonance with those of the fiscal authorities, which had a clear expansionary bent in some cases (Antigua and Barbuda, Belize, Barbados, Guyana, Saint Lucia, Suriname and St. Vincent and the Grenadines). Contrarily the 1 See table 1 for the list of countries considered 2 rest of the countries adjusted their public finances mostly through the curtailment of expenditures and, to a lesser extent, through the implementation of fiscal reform proposals. Countries also plan to introduce reforms to the taxation of the consumption of oil and petroleum products. Most governments subsidize the consumption of oil generating fiscal losses due to the widening gap between the internal and external prices. In a few cases (Antigua and Barbuda, Dominica and Grenada) fiscal adjustment was accompanied by debt restructuring policies. Notwithstanding these efforts, the high levels of debt continue to raise concerns (58% and 69% of GDP on average for 2004 and 2005) particularly in the cases of the smaller economies. A case in point is that of Belize whose authorities defaulted on its debt obligation payments in the second semester of 2006. On the trade negotiations front, while multilateral negotiations have stalled, countries are moving ahead with the Economic Partnership Agreement (EPA) with the European Union and the regional integration processes. In 2006 the CARICOM Single Market (CSM) was launched. As it stands the CSM provides for free mobility of goods and a limited mobility of factors of production. Labour mobility is limited to six categories of skilled labour. Countries also established the regional development fund, to be administered by a Regional Development Agency, to assist disadvantaged sectors, regions and countries. The prospects for 2006 and 2007 are encouraging and most Caribbean countries are expected to grow within a 4%-5% range. Growth will be underpinned by the continuing dynamism of external demand, positive terms of trade effects for mineral producing economies and increased construction activity. The stabilization of spot oil prices can provide a chance for policy makers to relax their monetary stance to sustain the growth impetus without endangering sound fiscal policy commitments. The survey is divided into four sections. The first presents a regional economic overview of CDCC economies. The second section introduces two topics which are of special interest for the Caribbean for the current biennium. These are the impact of oil prices and the effects and implication of the Cricket World Cup. The third section, analyses the performance of Caribbean economies on a country-by- country basis. Where data availability permits, a table with the main macroeconomic indicators is included in the analysis of each country. The final section is a statistical annex reproduced in the accompanying CD. It consists of a series of statistical tables, that include for the majority of economies, the distribution of GDP by sector of economic activity (in levels and rates of growth); real sector indicators; the fiscal accounts of the central government; a monetary survey; the balance of payments according to the methodology of the International Monetary Fund (IMF) 5th Manual; and external sector indicators. This last set includes the external debt, exports (usually classified by traditional and non-traditional); imports (usually classified by economic category) and, when relevant, tourism indicators. 3 I. REGIONAL OVERVIEW 4 1. Sectoral performance 1.1 Introduction In 2005,