LIMITED LC/C AR/L. 138 28 September 2007 ORIGINAL: ENGLISH ECONOMIC SURVEY OF THE CARIBBEAN 2006-2007 This document has been reproduced without formal editing. Table of contents Executive summary............................................................................................................................................ 1 I. Regional overview: Macroeconomic and sectoral performance .................................................4 A. Global trends .............................................................................................................................4 B. Growth performance............................................................................................................... 5 C. Sectoral perform ance..............................................................................................................7 D. The external sector performance........................................................................................ 10 E. Fiscal policy............................................................................................................................14 F. Monetary policy.....................................................................................................................19 F. International trade negotiations and economic integration ..........................................22 G. Economic outlook .................................................................................................................27 II. ANALYSIS OF SELECTED TOPICS.......................................................................................... 28 A. Remittances, migration and Caribbean development ...................................................28 B. Commodity prices and natural resources dependency ..................................................40 III. Country briefs............................................................................................................................................ 51 A. Aruba........................................................................................................................................ 51 B. B aham as.................................................................................................................................. 58 C. B arbados ................................................................................................................................. 64 D. B elize....................................................................................................................................... 71 E. Eastern Caribbean Currency Union ..................................................................................78 F. G uyana.....................................................................................................................................98 G. Jam aica...................................................................................................................................106 H. Netherlands Antilles ............................................................................................................113 I. Surinam e................................................................................................................................119 J. Trinidad and Tobago ...........................................................................................................126 Bibliography ................................................................................................................................................. 133 Executive summary This survey provides an overview of the macroeconomic performance of countries of the Caribbean Development and Cooperation Committee (CDCC) for the year 2006 and their outlook for 2007. The report consists of three chapters. The first one provides a regional analysis of the main economic indicators from a comparative perspective. The second chapter deals with two selected topics of particular relevance for the economic development of Caribbean countries, namely remittances and migration, and natural resources dependency. The last chapter presents country briefs with the main macroeconomic developments recorded in 2006 and the outlook for 2007. A statistical annex is also provided in the accompanying CD. This Executive Summary is based mainly on the first chapter. In 2006, economic growth remained robust in most Caribbean countries as a result of different events, especially ongoing surges in commodity prices and significant public and private investment in infrastructure related to the Cricket World Cup (CWC) of 2007. On average, the Organisation of Eastern Caribbean States (OECS) expanded by 6.3 per cent, led by rapid growth recorded in Antigua and Barbuda (11 per cent), Grenada (7 per cent) and Saint Lucia (7 per cent). Non-OECS countries posted a slower but still significant growth rate of 5.4 per cent. Trinidad and Tobago was the leader in this latter group, with an impressive GDP increase of 12 per cent, which was mainly the result of the combination of still high oil and gas international prices and significant public investment. The other countries registered growth rates between 2.5 per cent (Jamaica) and 5.8 per cent (Belize and Suriname). Overall, the region posted an average GDP growth rate of 5.8 per cent, 1.3 percentage points higher than in 2005. It is worth noting the substantial recovery of Guyana which registered an output expansion of 4.7 per cent, more than offsetting the drop of 2 per cent recorded in 2005. In 2006, the external sector showed a significant improvement in the region as a whole. On average, the balance of goods recorded a deficit of 11.7 per cent of GDP, almost 20 percentage points of output less than in 2005. This drastic reduction in the trade deficit explains the contraction of the current account deficit from 15.5 per cent of GDP in 2005 to 8.5 per cent in 2006. This positive evolution was mainly in the non-OECS countries. Indeed, the OECS countries observed a widening in both accounts in 2006 as compared to 2005. The evolution of the external sector in 2006 showed mixed results closely linked to the productive structures of the countries and, more specifically, the condition of exporters or importers of oil. Countries rich in crude, such as Trinidad and Tobago and Suriname, reported significant merchandise trade surpluses that also fed perceptible current account surpluses. Aruba joined the group of surplus countries in 2006. Other countries rich in natural resources, such as Jamaica and Guyana, experienced a widening in their trade and current accounts gaps due in part to significant increases in the oil import bill. In the deficit countries, in 2006 the current account gap was totally or partially financed by a surplus in the financial and capital account. In the Bahamas, the main source of financing was foreign direct investment (FDI), but these inflows were not enough to close the current account gap (30 per cent of GDP). In the case of Jamaica, the issuance of a 30-year sovereign 2 bond for US$ 250 million allowed the country for the third consecutive year to record a surplus in the balance of payments that amounted to 2.3 per cent of GDP. Likewise, significant capital inflows related to development assistance reported in Guyana more than offset its current account deficit (31.5 per cent of GDP) and permitted a balance of payments surplus of 5 per cent of GDP. On the other hand, Barbados and Belize experienced contractions in both their trade and current account deficits. The surpluses observed in the capital and financial account led to small overall surpluses in the balance of payments in both countries. On the fiscal side, in 2006 the region registered a small improvement in the public sector balance fuelled by GDP growth that allowed revenue to grow faster than expenditure. As a result, the average fiscal balance posted a surplus of 1.3 per cent of GDP. Excluding interest payments on public debt, the fiscal (primary) surplus increased from 6 per cent of GDP in 2005 to 6.3 per cent in 2006. Total revenue expanded for the fourth year in a row, around 16.6 per cent relative to 2005, whereas the tax take increased even more (20 per cent) to amount to 30.3 per cent of GDP. Total spending also expanded, and totaled 31.9 per cent of GDP in 2006. The increase in capital expenditure (28 per cent) more than offset the reduction in interest payments on public debt that dipped from 5.9 per cent of GDP in 2005 to 5 per cent in 2006. In 2006, the fiscal position improved in the majority of countries relative to 2005. Trinidad and Tobago exhibited the major fiscal surplus (6.5 per cent of GDP) due to a combination of high fuel prices and the expansion of gas exports. In Belize, the contractive fiscal policy was very effective, curtailing the fiscal deficit from 4.3 per cent of GDP in 2005 to 1.7 per cent in 2006. This significant improvement was the result of a combination of higher revenue and lower spending (as a percentage of GDP). The latter was also observed in Suriname which posted a fiscal surplus of 2.4 per cent of GDP, an improvement of 3 percentage points of GDP relative to 2005. In the case of Guyana, the fiscal deficit contracted from 14.3 per cent of GDP in 2005 to 13 per cent in 2006, due to the combination of better tax administration that increased the tax take in 1 per cent of output and debt relief (mainly linked to the Multilateral Debt Relief Initiative, MDRI) that halved interest payments on public debt to 2.5 per cent of