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The economic challenges ahead for OECS members

The sub-regional Organisation of American States (OECS) has prepared a document to give guidelines to member states on how to face up to the challenges posed due to the coronavirus.

The document was prepared by the Economic Affairs Secretariat with the St. Lucia-based organisation which groups the islands of the Windward and Leeward.

As a public service, THE NEW TODAY reproduces excerpts from the report:

OECS Member States are challenged by high levels of vulnerability due to a unique combination of economic, social, and environmental factors.

Over time, these factors have hindered the attainment of sustainable economic growth and the capacity of OECS Member States to bounce back from external shocks. The COVID-19 crisis has again exposed the fragility of OECS economies.

In the months preceding the COVID-19 crisis, the economic climate in the Eastern Caribbean was characterised by sluggish economic growth, high levels of public debt, high levels of unemployment (particularly among the youth), over-dependence on tourism for foreign exchange earnings, high food import bills, and persistent trade imbalances.

Additionally, many Member States have fragile and under-financed public health systems plagued by dated infrastructure and limited human resources. Importantly, significant portions of OECS populations lack any form of health insurance.

Notwithstanding efforts made towards economic diversification, the Eastern Caribbean has registered subdued economic expansion over the past two decades.

During this period, OECS economies have experienced critical setbacks in the areas of agricultural trade, repeated encounters with catastrophic weather events, and a challenging external macroeconomic environment for Small Island Developing States (SIDS).5 Notable trends over this period include a concerted reallocation of resources toward the services sector and the rise of Citizenship by Investment (CBI) programmes pioneered by St. Kitts and Nevis in 1984.

Despite these efforts, the prolonged negative consequences of the 2008 Global Financial Crisis has meant that economic growth among OECS Member States has not returned to the pre–GFC levels that were characterised by sustained growth rates of above 2.5% per annum. During the more recent period of 2015 to 2019, OECS economies returned to positive growth, averaging approximately 2.6%.

While growth of 3.3% was forecast for 2020 by the Eastern Caribbean Central Bank (ECCB), the COVID-19 crisis has all but evaporated any prospects of this growth.

Over the last decade, failure to restore sustainable economic growth has led to stubbornly high rates of unemployment, particularly among the youth. While data on youth unemployment remains scarce, recent estimates suggest youth unemployment rates are double the total rate of national unemployment within every Caribbean country.

These persistently high levels of unemployment continue to place pressure on the ability of Member States to provide adequate social protections like unemployment benefits.

Nonetheless, such policies are necessary to lower the prospects of poverty and rising crime in the region, particularly when faced with the immediate and medium-term impacts of the COVID-19 crisis.

Such policy measures will be of even greater importance given the expected decline in international remittance flows which will likely result from the deteriorating economic condition of the Caribbean diaspora who reside in countries like the United States.

For instance, remittances from the United States account for nearly 50% of all remittances received by Antigua and Barbuda, Dominica, Grenada, St. Kitts and Nevis, Saint Lucia, and St. Vincent and the Grenadines.

It is also important to note that the private sector in the Eastern Caribbean remains under-financed with a limited capacity to absorb meaningful numbers of the unemployed.

Given the frequency of catastrophic natural disasters and the continuous need for OECS governments to re-invest in infrastructural and social programmes, public debt in many Member States has surpassed the prudential level of 60% debt-to-GDP ratio established by the ECCB.

While the average debt-to-GDP ratio within the Eastern Caribbean Currency Union (ECCU) stood at 68% in 2018, without sufficient concessionary financing, the expected decline in tax revenues during the immediate period, coupled with the need for OECS governments to provide support measures to cushion the economic damage of this crisis, will most likely increase public debt in the medium-term.

Due to their small size and geographic remoteness, OECS Member States suffer from “double exposure” to external economic and environmental shocks.

Member States are therefore highly reliant on trade, with tourism often being a key export sector and an important source of income and employment. In aggregate, across the region, approximately 50% of GDP and 50% of employment is derived directly from this sector.

Sectors with direct linkage to tourism, such as construction, agriculture, transportation, banking, manufacturing, and the creative industries, have historically benefitted from the positive multiplier effect associated with a robust tourism sector.

Numerous hotel closures and widespread suspension of airlift have resulted in the transmission of negative impacts to the wider economy. This has led to a spike in unemployment and a sharp contraction in GDP which is likely to continue for the foreseeable future.

Record levels of unemployment and associated decreases in spending power in major tourism source markets in North America and Europe point to a challenging road to the full recovery of the sector. While there are opportunities to expand agricultural and manufacturing output once social-distancing and other health protocols begin to relax, demand and production activities in these sectors will likely remain subdued in the absence of adequate policy support.

The construction sector is an important contributor to economic growth and development in the OECS Member States. Over the past five years, the sector’s contribution to GDP has averaged 7.9% across the ECCU.

Growth in this sector during the period 2015 to 2019 largely mirrors the performance of the overall economy. Across the region, public sector expenditures on the rehabilitation of public infrastructure, such as roads and schools, and private investments in the tourism accommodation sector, the commercial real estate sector, and residential homes, have significantly contributed to the positive performance of the sector.

Further, construction has had strong spillover effects on other sectors such as mining and quarrying, transport, storage and communications, and wholesale and retail trade. Therefore, the construction sector is also a major contributor to employment and incomes across the region.

The immediate impact of the pandemic on the construction sector is expected to be significant due to a high reliance on tourism investment and public sector capital expenditure. During the Global Financial Crisis, the sector declined by -13.6% and -15.36% in 2008 and 2009 respectively.

The implementation of social-distancing protocols, coupled with travel restrictions and the redeployment of capital to addressing a public health emergency, has brought non-essential construction in the OECS to a complete halt.

The rebound of the construction sector will likely be tied to the relaxation of travel bans, access to construction materials, accommodating capital markets, and access to efficacious medical treatments to COVID-19.

As Member States design policy responses to the crisis, significant effort must be dedicated towards addressing longstanding vulnerabilities related to regional food security by increasing local and regional production of agricultural foodstuffs.

According to the FAO, between 60% and 80% of all food consumed in CARICOM is imported. Increasing production and regional trade will also contribute to an improvement in the balance of payment position of Member States.

The financial sector has accounted for a significant portion of overall GDP in the ECCU over the past decade.

Prior to the crisis, the sector was engaged in policy adjustments in response to the threat of Organisation for Economic Co-operation and Development (OECD) ‘blacklisting’. Other significant downside risks faced by the sector have been the loss of correspondent banking relationships (CBRs), a continued withdrawal of international banks from the region, and the recent trend towards financial sector consolidation.

The combination of these threats has created uncertainty and increased the risk-premium for inward investments into the region. COVID-19 is expected to amplify these threats to the continued viability of the financial sector.

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