Tag Archives: St. Kitts and Nevis

The Caribbean: A darkening debt storm

From the Financial Times By Robin Wigglesworth and Benedict Mander

The region is beset by economic fragility that is exacerbating the dangers posed by organised crime

 

 

No place to shelter: a hurricane hits Jamaica, which must now abide by the terms of a $2bn bailout from the IMF, World Bank and Inter-American Development Bank

When Hurricane Ivan pummelled Grenada in 2004, fierce gales snapped telephone masts like twigs. With the lines down, it took days before the outside world learnt the scale of destruction the tropical storm had wreaked in the Caribbean state.

In a country of just 100,000 people, 39 died. Aside from the physical scars, Ivan left a lasting, debilitating legacy: huge government debts inflated by the expense of rebuilding battered schools, infrastructure and homes. Despite restructuring those debts in 2005, Grenada was still vulnerable when the financial crisis struck, hurting its vital tourism industry. Finding itself on the ropes again, Grenada last month had to renege on its debts.

Grenada is not alone. Many of the smaller countries in and around the Caribbean basin are economically and financially stricken. International Monetary Fund officials say the region is on a “knife’s edge” as it faces years of painful adjustments. This economic fragility has critical implications for regional security. The Caribbean has become an increasingly violent nexus for trafficking drugs, guns and people – and fears are growing that piracy is returning as a strategic threat.

While the US and Europe have lessened their engagement with the Caribbean, many of its countries have found a new friend willing to offer vital aid and investments: China. Former US President George W. Bush described the Caribbean as America’s “third border” but Beijing is now arguably on the cusp of supplanting Washington as the effective regional power.

As a result, officials inside and outside the region say the Caribbean is entering a crucial period that it will struggle to navigate unscathed. “The Caribbean is at a crossroads,” says Arnold McIntyre, the Grenadan head of the IMF’s regional technical assistance centre. “It faces its most formidable economic challenge since independence.”

The debt mountain is one of the clearest indications of the Caribbean’s woes. Excluding the larger countries such as Haiti, the Dominican Republic and Cuba – relatively populous nations with very different challenges – the region’s overall government debts amount to more than 70 per cent of gross domestic product, according to the IMF. For small, open economies, that is dangerously high, says Stuart Culverhouse, chief economist at Exotix. Jamaica’s debt was even higher at the end of last year, reaching 143 per cent of GDP. This is forcing the country into a painful fiscal retrenchment as it has to abide by the terms of an IMF bailout.

The strain is already becoming too much for some countries. St Kitts and Nevis, Belize and Jamaica have had to restructure. Sebastian Espinosa of White Oak, a advisory firm helping Grenada with its restructuring, warns that others could follow if growth does not recover soon. Even wealthier states such as the Bahamas are considered vulnerable. “The Caribbean is ground zero for sovereign debt restructurings,” says Carl Ross of Oppenheimer, a US investment bank.

Yet debts are a symptom not a cause of the region’s underlying malaise. Restructurings will offer only a temporary respite. Hurricanes are only partly to blame. Although ferocious storms cause periodic devastation, the fundamental challenges are political and economic. Irresponsible government spending has compounded the problem facing uncompetitive Caribbean states. Simply because of their small size, the economies have to import most of their basic goods and are always vulnerable to any shocks.

Since the independence wave of the 1960s and 1970s, public spending on social programmes, education and jobs has steadily increased. But growth has largely remained sluggish, dependent on niche sectors such as banana and sugar exports to Europe, financial services and tourism.

The result has been decades of stubbornly high budget and trade deficits, financed by borrowing. “We have adopted a tradition in these islands that the government’s role is one of largesse … and patronage,” says Mark Brantley, opposition leader in St Kitts and Nevis. “Governments have continued to borrow and spend with no attention to fiscal sobriety.”

The former European colonies in the Caribbean had enjoyed preferential access to the EU for banana and sugar exports. But after a legal battle dubbed the “banana wars” the World Trade Organisation in 1997 ordered an end to the arrangement, arguing it discriminated against other producers. This was a heavy blow, particularly to big sugar producers such as St Kitts, and banana exporters such as Belize and Dominica. In the latter, banana exports collapsed to just 1.5 per cent of GDP in 2008, from almost a quarter in 1988.

Tourism long proved more buoyant. Increasing numbers of visitors triggered a tentative improvement in government finances around the turn of the millennium. But the financial crisis clobbered tourism revenues and budgets have unravelled again.

George Tsibouris, the IMF’s eastern Caribbean division chief, says the region is now facing yet another “lost decade”. “It will take years of commitment to these goals to bring the ship safely back to shore,” he predicts.

Visitor numbers have started to pick up again, particularly in countries that traditionally attract more US than European visitors, such as Jamaica and the Bahamas. Alan Leibman, chief executive of Kerzner International, which manages the Atlantis hotel in the Bahamas, says that “it has been a challenging few years” but notes that January was the hotel’s best ever month for bookings.

Nonetheless, visitors are spending less money, and countries popular with Europeans, such as Grenada, are facing particularly steep drops in tourism revenue. Tourism is also often a zero-sum game: one country’s gain is often its neighbour’s loss.

Unexpected shocks have hit even the stronger states. In January 2009, CL Financial, an insurance conglomerate based in energy-rich Trinidad and Tobago, unexpectedly imploded. This proved to be the Caribbean’s Lehman Brothers, rattling almost every country in the region. The IMF estimates the cost of the collapse at 3.5 per cent of GDP on average for the Caribbean countries – rising to more than 10 per cent for Trinidad and Tobago. The clean-up continues.

Aid to the region has also shrivelled since the end of the cold war. Multinational organisations such as the IMF, the World Bank and the Inter-American Development Bank are putting their time and money into the region – most recently agreeing a four-year $2bn aid facility for Jamaica. But local officials feel the Caribbean’s traditional friends – the US, the UK and to an extent Europe – have lost interest.

Keith Mitchell, Grenada’s prime minister, says he understands that the US’s budgetary crisis is constraining its aid, but adds “it is somewhat difficult for us not to feel a sense of neglect when we see the US write off large amounts of debts owed by countries that it considers strategically important”.

China, on the other hand, has become increasingly influential in Caribbean capitals. The initial trickle of aid was tied to accepting Beijing’s “One China” policy and breaking off relations with Taiwan. The reward took the form of sparkling new cricket stadiums that were built and paid for by China. But David Jessop, the head of the Caribbean Council, a consultancy and think-tank, argues that Beijing’s policy has recently evolved markedly.

“The past couple of years its money has been redirected from financing small vanity projects to large scale investments and a heavy Chinese presence on the ground,” he says. “It is distinctly different from a few years ago and appears to be more strategic in its intent.”

Caribbean nations are treating China’s advances with a mix of curiosity, apprehension and eagerness. Andrew Holness, the former prime minister of Jamaica and now leader of the opposition, insists that the US is “our longstanding close friend” but says his country “is in a pivotal position regionally to help project China”.

Nevertheless, few expect China to be the Caribbean’s white knight. More effective remedies will have to come from the Caribbean itself.

One of the favoured solutions is to weave the smaller Caribbean countries closer together – economically, financially and politically. This would allow micro-states to rationalise the money they have to spend on the necessities of nationhood such as embassies or coastguard forces. A common market for goods, capital and labour could rear bigger companies.

 

“It’s hard to see how they can extricate themselves from their problems while insisting on remaining independent sovereign states,” notes Sir Ronald Sanders, a former diplomat for Antigua and Barbuda.

The Caribbean Community, or Caricom, was set up in the 1970s specifically for this purpose, but the Guyana-based body appears to have atrophied. Criticism is rife. “Caricom is a busted flush,” one observer says.

Organisations such as the IMF are supportive of closer co-operation, but some warn of its limits. Some officials have become cynical and doubt Caribbean politicians will truly relinquish any meaningful sovereignty, complaining that they have yet to fathom the depth of their crisis.

“Closer integration is like economic theology in the Caribbean,” says one official. “All the politicians chant about the importance of integration at meetings, but then go back home and say ‘no one is coming to our country to work without a work permit’.”

The Caribbean states do have some advantages, however. They are, for the most part, stable democracies and investments in education have forged a relatively highly skilled workforce. Although the “brain drain” is acute, emigrants’ remittances have become a vital source of foreign currency.

Moreover, many countries can count on plentiful resources. Trinidad and Tobago is a large exporter of liquefied natural gas. Guyana and Jamaica are leading bauxite producers. The Dominican Republic, the region’s biggest economy after Cuba, is growing relatively steadily.

Much can also be done to make the Caribbean more resilient to natural disasters. A disaster insurance facility is promising and the World Bank is advocating investments in buttressing buildings to lessen storm damage. “It’s cheaper to make something more durable and hurricane-proof than rebuilding it after a storm,” says Françoise Clottes, the World Bank’s Caribbean director.

Nonetheless, no one is under any illusion that the years ahead are going to be anything but tough. Debts are too high, the budget deficits too big and economies too weak for countries to be able to avoid deep budget cutbacks. That will prove painful.

“Poverty, insecurity and crime are going to go up,” warns Gerard Johnson, the Inter-American Development Bank’s Caribbean general manager. “This is an existential crisis.”

Petrocaribe: An imperilled lifeline of cheap oil

The death of Venezuela’s president, Hugo Chávez, will be felt keenly across the Caribbean, where there are fears that the socialist leader’s oil-funded largesse may begin to dry up.

Most countries in the region have come to depend on Venezuela’s subsidised oil through the Petrocaribe agreement for the smooth functioning of their economies.

Signatories can buy shipments of Venezuelan oil on extremely generous terms, receiving a lifeline for struggling economies that can ill-afford market rates. Some pay as little as 5 per cent upfront (at the most 50 per cent) and just 1 per cent interest on the rest, which can be paid over periods of up to 25 years.

Although Cuba is the biggest recipient of Venezuela’s aid, receiving around 100,000 barrels per day, worth more than $3bn last year, the smaller Caribbean islands import most if not all of the oil they consume, and are especially vulnerable.

Jamaica has said that if its Petrocaribe agreement were to end, it would need to find another $500m a year to pay for oil imports.

The Dominican Republic is saddled with about $3bn in debt for its 50,000 barrels per day, and is repaying much of its loan in kind. It recently sent Caracas a 10,000-tonne shipment of black beans.

Mr Chávez’s successor, Nicolás Maduro, is expected to safeguard Petrocaribe in the short term. But it will not last for ever. Mr Maduro will sooner or later be faced with some tough decisions as his own country’s economy faces severe challenges, which place the future of the policy at risk. Opposition politicians have called for an end to the discounted oil shipments.

“A lot of the smaller countries depend on the continuation of Chavismo in Venezuela,” says Victor Bulmer-Thomas, a professor at University College London’s Institute of the Americas.

Some countries have begun to take precautions. Offshore exploration has taken off in the past year across the region, with the Bahamas, Jamaica and Barbados all announcing plans to start oil and gas exploration in their territorial waters.

Here is a link to the Fincial Time article.

French “black list” – St. Kitts and Nevis added

St Kitts and Nevis Prime Minister, Denzil Douglas, has denounced the Federation’s placement on France’s new blacklist of non-cooperative territories. He said that efforts taken by the Federation, and by other OECS countries, to meet international compliance standards relating to their financial services sector, is like “working towards a moving target.”

A statement from the Prime Minister’s Office said: “This blacklisting by France of countries that they claim have failed to cooperate on tax issues has caused tremendous concern for the Federation for a number of reasons.”

“The Federation has concluded negotiations and initialed agreements with 17 countries for the exchange of tax information and double taxation agreements by the end of 2009 and was in a position to sign all of these agreements at that time.”

Douglas commented: ”The Federation was told that we would have to wait until these OECD countries carried out their internal bureaucratic processes before we could be given a date or a venue for signature. We were able to sign eight of these agreements by the end of 2009 and we signed our ninth agreement with the UK in January of this year.”

”It is extremely unfair for St Kitts and Nevis to now be penalized by France for not meeting the required standard of 12 signed tax agreements as we sit and wait for OECD member countries to inform us that they are ready to sign these agreements.”

Douglas further informed that, responding to a call by St Kitts and Nevis and other OECS countries for assistance in getting agreements signed with OECD member countries in a more timely fashion, the World Bank has announced the appointment of a consultant to assist the OECS countries with this process.

“This consultant has actually negotiated with France the text of a Tax Information Exchange Agreement on behalf of the OECS countries which the Federation signed off on last month and we are now awaiting a date for signature of this agreement from the French government. It is therefore surprising that despite this development, France has seen it fit to move ahead of its other G20 counterparts to issue its own blacklist and to announce sanctions with effect from March 1, 2010, which are indeed quite punitive and will completely stagnate any investment by French nationals into the Federation and the OECS region. It is of further concern that countries blacklisted by France, even if they meet the international standard one week later, will remain on this blacklist until January 1, 2011, when this list will again reviewed,” the statement noted.

The statement added that it was based on the fear of situations like this blacklisting by France that in March 2009, the government passed the St Christopher and Nevis (Mutual Exchange of Information on Taxation Matters) Act, No 7 2009, which provides the legal framework for the Federation to give the force of law to Tax Information Exchange Agreements (TIEAs) signed by the Federation and allowing the Federation to unilaterally list countries in a schedule to this Act which would be entitled to make requests for tax information to the Federation pursuant to rules which are included in a schedule to this Act.

“These rules are based on the OECD model [TIEA] and are therefore in compliance with the international standard. The reason for the government taking this initiative was firstly to ensure that we would not be hindered by the cost and time involved in negotiating tax treaties to enable us to comply with our international obligations. Our experience in being able to receive dates for the signing of our already negotiated agreements has demonstrated that this fear was in fact justified,” it said.

“The OECD in a publication on its website dated April 21, 2009, entitled ‘Countering Offshore Tax Evasion: Some Questions and Answers on the Project’ clearly stated that the standard for transparency and tax information exchange can be implemented “through bilateral tax treaties or [TIEAs]; by multilateral agreements; or by domestic legislation allowing for the provision of information on a unilateral basis.”

Despite this endorsement of the unilateral mechanism by the OECD in its publication, the unilateral mechanism adopted by the Federation in March of 2009 to facilitate the provision of tax information to countries that make requests to the Federation is yet to be adopted by the OECD as a mechanism for implementation of the standard.

Douglas further noted that the government has been advised that the Global Forum, following an intervention made by St Kitts at the September 2009 Global Forum in Mexico, is now looking into the matter. However, this move to review this mechanism has obviously come a little too late for the Federation and many other OECS countries.

The Federation will be signing a TIEA with six Nordic countries on March 24, 2010, and will at the latest be removed from the OECD “grey list” on that date.

“This being said, we will continue to do our part to advocate for the official recognition of the unilateral mechanism to ensure that in the event that the threshold is again changed in the future, that we will not be in the position we now find ourselves where we are at the mercy of the bureaucracy of OECD countries. We will also continue with our attempts to bring a final conclusion to the negotiations with the countries that we have already initialed tax agreements with and with other countries that we are currently negotiating with,” said the statement.

St Kitts and Nevis has already signed agreements with Monaco, The Netherlands, The Netherlands Antilles, Aruba, the United Kingdom, Denmark, Belgium, New Zealand and Liechtenstein.

Countries the Federation has initialed or concluded negotiations with and are awaiting dates for signature are Australia, Canada, France, Germany, Norway, Sweden, Greenland, the Faroe Islands, Iceland, Finland and San Marino.

Countries the Federation has commenced discussions with about TIEAs but have not yet confirmed the text for these agreements are India, Japan, the Seychelles and the United States.

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