17874 'I - 1998 W_S~I~MIC DEELOPMENT CARIBBEAN ECONOMIC OVERVIEW CARIBBEAN ECONOMIC OVERVIEW 1998 The World Bank Caribbean Country Management Unit Latin America and the Caribbean Region This report was prepared under the auspices of the Caribbean Group for Cooperation in Economic Development (CGCED). Established in 1977, the CGCED is the main forum for policy dialogue and aid coordination among the Caribbean countries, international financial institutions, and bilateral donors. A meeting of the CGCED is held every two years in Washington, D.C., and is chaired by the World Bank. The June 8-11, 1998 CGCED meeting will discuss the following regional reports, besides the country reports: Caribbean Economic Overview (World Bank) Trade Policies in the Caribbean Countries: A Look at the Positive Agenda (World Bank) Workers and Labor Markets in the Caribbean: Policies and Programs to Increase Sustainable Economic Growth (Inter-American Development Bank) Wider Caribbean Financial Sector Review: Increasing Competitiveness and Financial Resource Management for Economic Growth (World Bank and the University of the West Indies) Caribbean Economic Overview 1998 JUNE 1998 The World Bank Preface The Caribbean Economic Overview 1998 was prepared for the meeting of the Caribbean Group for Cooperation in Economic Development (CGCED) in June 1998. Although discussions at the meeting will focus on issues for which specific reports are being prepared-trade policies in the Caribbean, workers and labor markets, wider Caribbean financial sector review-the Caribbean Economic Overview updates participants on how recent developments have affected economic growth in the region and how the evolution of international capital flows have affected the Caribbean. These subjects were chosen because of their importance for the region. Besides the main text, an annex presents brief summaries of the economic situation in each Caribbean country. The team preparing this report was comprised of Claudio Visconti (task manager) and the staff of the Caribbean Country Management Unit. Edgardo Favaro is the lead economist, and Orsalia Kalantzopoulos is the director of the Caribbean Country Management Unit. Contents PREFACE ................................................. i LIST OF ACRONYMS ..................................................v EXECUTIVE SUMMARY ................................................... vii 1 GROWTH PERFORMANCE AND FUTURE PROSPECTS ................................................1 Recent Growth Performance ........................................................1 Determinants of Growth .......................................................S5 Economic Reforms and Growth Prospects ........................................................6 2 TRENDS IN FINANCING AND INVESTMENT FLOWS ..................................................9 Financing Flows in the 1990s ........................................................9 Composition of Resource Flows ........................................................11 Financing Investment ....................................................... 13 Flows to Individual Countries ....................................................... 14 ANNEX - SUMMARY INDICATORS AND COUNTRY PROFILES .................................... 19 iff List ofAcronyms CARICOM Caribbean Community Secretariat CGCED Caribbean Group for Cooperation in Economic Development DOD Debt Outstanding and Disbursed FDI Foreign Direct Investment FS Foreign Savings GDI Gross Domestic Investment GDP Gross Domestic Product GNFS Goods and Nonfactor Services GNS Gross National Savings GNP Gross National Product HIPC Heavily Indebted Poor Countries IDA International Development Association IDB Inter-American Development Bank IMF International Monetary Fund OECD Organization for Economic Cooperation and Development OECS Organization of Eastern Caribbean States WTO World Trade Organization XGNFS Exports of Goods and Nonfactor Services v Executive Summary i. Although some Caribbean countries achieved satisfactory economic growth in 1996-97, the region as a whole is still growing slowly. Tourism, other service exports, and manufacturing are leading the Caribbean growth. In none of these areas, however, is the region growing as fast as the world market. Although this is not necessarily cause for concern, the demise of traditional preferential trade arrangements and the expansion of international competition, especially from Mexico, threaten to undermine the bases for even the modest growth achieved recently. To prepare for these eventualities, the Caribbean countries need to accelerate the policy adjustments that will facilitate diversification of the private sector. ii. For several years the major industrial countries have been reducing aid flows and emphasizing export development in their assistance strategies. The countries of the Caribbean have accepted this as the new reality and recognized it as beneficial to them in the long run. To achieve those long-run benefits, however, the main industrial trading partners need to improve the export opportunities for nontraditional Caribbean products. iii. Caribbean countries, particularly the larger ones, continue to attract private investment from the rest of the world, offsetting the decline in official financing flows in the 1990s. Nevertheless, the servicing of official debt by these governments puts a serious burden on public saving. Moreover, total private flows have not grown further since 1992, but foreign direct investment (FDI) has. This is a favorable change in composition, because experience indicates that, relative to other private flows, FDI is less liquid and less volatile, more likely to increase efficient investment and growth, and less likely to finance unsustainable government spending and exchange rate overvaluation. iv. The increased openness of most Caribbean economies over the past decade, the improved macroeconomic stability, and the growth of foreign direct investment are reasons to expect that overall growth will accelerate in the future. Achieving more sustainable and higher growth rates will require, nonetheless, improved policy and incentive frameworks through investments in education and health, adequate enforcement of property rights, and proper macroeconomic management so as to stimulate savings and investment. Growth Performance and Future Prospects The Caribbean' countries exhibit contrasting differences among their economies, with income levels ranging from low in Guyana and Haiti to upper middle in Barbados and some countries of the Organization of Eastern Caribbean States (OECS). Overall the export-diversification strategy of moving into services, including tourism, a strategy to which most countries subscribed as a medium-term objective, succeeded where it was pursued. Countries that moved slowly with this strategy, however, now need to implement it more expeditiously in order to prepare for the accelerating changes in the world economy and the ensuing competition. Presently, the countries where these industries have developed most strongly-Barbados, the Bahamas, and some of the OECS countries-are the ones with the highest per capita income in the region. This chapter describes the growth performance of the region in the 1990s, discusses the determinants of growth, and explores the links between economic and institutional reforms and the prospects for growth. Recent Growth Performance Growth in the Caribbean has stemmed mainly from two activities: tourism and free trade zones. This clearly suggests that the further opening of the region is the shortest way to increase economic growth. A secondary, but immediate, concern is the sustainability of growth. In this respect, the main agenda for the governments of the region is to act decisively so that the main factors determining growth, as discussed in the next section, are satisfied without much delay. Unless otherwise noted, Caribbean refers to the member countries of the Caribbean Group for Cooperation in Economic Development: Antigua and Barbuda, Bahamas, Barbados, Belize, Dominica, Dominican Republic, Grenada, Guyana, Haiti, Jamaica, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, Suriname, and Trinidad and Tobago. CARIBBEAN ECONOMIC OVERVIEW Since the 1980s, the Caribbean countries have undertaken various reform and stabilization programs with mixed results. In general, full implementation has not been pursued, and second-generation reforns have not followed suit. For most countries in the region, average growth rates have been positive during the 1990s (table 1.1). These rates, however, have also been lower than they were in 1981-90, with the exception of the Dominican Republic, Guyana, Suriname, and Trinidad and Tobago. Most economies rebounded in 1996-97 due basically to the improved performance of exports, in general, and tourism and free trade zones, in particular. Output in Jamaica, nonetheless, continued to contract following the trend of a long-lived economic downturn. Table 1.1 Real GDP Growth Rate, 1981-97 (annual average percentages) Country 1981-90 1991-94 1995 1996 1997 Antigua& Barbuda 6.1 3.6 -4.2 5.8 4.8 Bahamas 2.9 -0.5 0.3 4.2 3.0 Barbados 0.9 -1.3 2.7 5.2 2.9 Belize 5.0 4.4 3.9 1.4 3.8 Dominica 4.6 2.3 1.8 3.2 3.1 Dominican Republic 2.6 4.0 4.8 7.3 8.2 Grenada 4.7 1.1 2.7 3.5 3.6 Guyana -2.7 7.6 5.0 7.9 7.0 Haiti -0.5 -5.0 4.4 2.8 1.1 Jamaica 2.5 1.2 0.5 -1.8 -2.4 St. Kitts & Nevis 5.8 4.5 3.7 5.8 5.0 St. Lucia 5.3 3.0 4.1 3.8 3.5 St. Vincent & Grenadines 6.5 2.4 7.4 3.0 5.0 Suriname 0.5 -0.5 5.0 3.0 5.6 Trinidad & Tobago -2.3 0.7 3.8 3.5 4.1 Region 1.2 1.7 3.1 4.1 4.4 Source: World Development Indicators database of the World Bank, World Bank staff estimates, and Intemational Financial Statistics database of the Intenational Monetary Fund. Regional growth has been strongly influenced by the performance of the Dominican Republic, the largest economy in the region, with a U.S. dollar gross domestic product (GDP) in 1996 higher than that of Jamaica and of Trinidad and Tobago (the next two largest economies) combined. The bias introduced by the performance of the Dominican Republic is clear when this country is excluded from the group. In this case, for instance, the resulting average growth for the region in 1995-97 was 1.8 percent instead of 3.8 percent. The internal causes of this lackluster regional growth stem from economic mismanagement and midway reforms in addition to the existence of inappropriate incentive frameworks in many economies. 2 I Growth performance andfuture prospects In per capita terms, the region has been improving (relative to 1985-90), albeit at a rate that is far from the minimum necessary to abate its various pockets of poverty. Haiti had the worst growth performance of the group, but even in the other countries, per capita growth was relatively slow. Compared to international standards, the region underperformed East Asia and the Pacific, where annual per capita GDP for the period grew 8.4 percent, South Asia, 3.4 percent, Latin America and the Caribbean, 1.4 percent, and high-income OECD countries, 1.2 percent (table 1.2). Finally, the Caribbean outperformed the Middle East, Africa, and Europe (low-income) and Central Asia, where growth was negative on average, but this hardly addresses the aspirations of the region. Table 1.2 Growth and Integration, by Region (annual averages 1991-1996) Realpercapita Trade(XOlof FDInetinflows FD pnetrows Intrltour Region GDP growth GDP, PPP) (%6 of GDP) cap(ta) per re-pS)( EastAsia&Pacific 8.4 52.1 d 3,5 22.3 7.2 Europe'& Central Asia -5.3 68.0 0.9 18.6 9.2 High income (OECD) 1.2 35.1 d 0.7 167.8 6.1 Latin America & Caribbean 1.4 32.4 1.5 47.6 9.0 Caribbean 0.9 b. c 52.0 3.1 48.0 39.4 Caribbean (1985-90) -0.3 b 53.5 1.1 14.6 34.2 Middle East&NorthAfrica -0.1 d 598 d 0.6 7.4 6.4 South Asia 3.4 27.0 0.4 1.4 6.2 Sub-Saharan Africa -0.6 55.2 0.9 4.6 5.0 a. Does not include high-income economies. b. Does not include Haiti. c. 1991-97. d. 1991-95. e. Does not include Antigua & Barbuda and St. Lucia. Sowce: World Development Indicators database and Global Development Finance database of the World Bank, World Bank staff estimates, and Intemational Financial Statistics database of the Intanational Monetary Fund. Most Caribbean economies have substantial trade and financial relations with the rest of the world, but some barriers remain, even among CARICOM countries. Net inflows of foreign direct investment, both as a share of GDP and per capita, have been substantial, relative to international standards and grew about threefold over the 1985-90 period. These economies have traditionally been very open, in the sense of high export and import (trade) shares of GDP, largely because of their size. In addition to that, tourism, revenue has been a stable component of total exports for the past decade, contributing about one-third of its value, which is a much higher ratio 3 CARIBBEAN ECONOMIC OVER VIEW than other regions exhibited. However, openness in the sense of foreign exchange convertibility and lack of price distortions, relative to world prices, has come more recently and more slowly. External conditions partly explain the growth outcome of the Caribbean in 1994-96. Hurricanes and tropical storns retarded growth in St. Lucia in 1994-95 and in Dominica, St. Kitts and Nevis, and Antigua and Barbuda in 1995-96. Moreover, continued growth in Europe and the United States kept the Caribbean tourist industry growing, if not in high boom. Also, higher world mineral prices helped exporters of oil (Trinidad), nickel (Dominican Republic), and bauxite (Guyana, Jamaica, and Suriname). Finally, increasing international price for sugar, brought mixed news for sugar exporters. The reform of the Common Agricultural Policy in Europe, where most Caribbean sugar is sold, brought the European price closer to the world price and thus lowered the effective value of the preferential access. For countries, like Guyana, that can produce more at the lower price, opportunities will improve because expansion of the European Community is leading to higher sugar quotas for the Caribbean. Nonetheless, the World Trade Organization (WTO) ruling on the banana issue left open the possibility of a similar action involving other commodities. In contrast, banana exporters (Belize, Jamaica, and the Windward OECS economies) will face stiffer competition, created by the dismantling of the special import license system, starting in 1999. The proposal adopted by the European Commission in January 1997, to bring the Common Market Organization for bananas into confornity with WTO rules, radically alters the market conditions for traditional African, Caribbean, and Pacific exporters. This market reversal makes it all the more urgent for the region to pursue economic alternatives to substitute for the banana business, as sources of foreign exchange. Exports of goods and nonfactor services as a share of GDP were already high and increased in the last decade in most countries, but the aggregate change was not large for the region. Tourism revenues followed a very similar pattern, although in a more stable fashion (figure 1.1). The leading countries in total exports were the Dominican Republic (exports grew 16 percent) and Trinidad and Tobago (16 percent), while in tourism receipts they were the Dominican Republic (18 percent), Barbados (11 percent), and St. Kitts and Nevis (10 percent). The composition of exports of goods has changed greatly since the early 1980s. Whereas primary products dominated the region's exports until the mid-1980s, manufactured exports have grown considerably and are now the leading export to the U.S. market. 4 I Growth performance andfuture prospects Figure 1.1 Export Performance (% of GDP) 19 46 -,,,,, -- - -- - -- - --- - ------ ------- ' -8 46--~~~~~~~~~~~~~~~~~~~~~~ 18 44 ' ' ' ..... '/ '' ' 1 17 42 . .... ... .' 16 40 15 1986 1988 1990 1992 1994 1996 |-*-XGNFS -u-Int'ltourlmsreceipts Determinants of Growth Countries in the Caribbean region have pursued, to various degrees, macroeconomic stabilization policies and structural and institutional reforms in the last decade, aiming to achieve more efficient economic management and to create the right incentive framework for private sector-led growth to thrive. Still, much remains to be done. Poverty is still present, fiscal resources are limited, institutions have to be strengthened, private sector activity is not always present, and growth is not fully sustainable. For instance, the need to shift away from the banana business and find viable economic alternatives has constituted a real challenge for many countries. In light of the current situation, how should scarce resources be effectively mobilized to create a solid basis for sustainable growth? Recent empirical studies2 have provided strong support to the hypothesis that per capita growth rates depend on two classes of factors: (i) on the initial level of per capita income; and (ii) on a group of choice and environmental variables, such as the initial levels of education, life expectancy, population growth, business and political environment, extent of market distortions, and external shocks. Two propositions derive from the hypothesis above: (i) per capita growth rates will be higher the lower the initial level of per capita income, given the values of the remaining variables; and (ii) per capita growth rates will be higher the higher the educational attainment of the population, the higher the life expectancy, the lower the population growth, the less distorted the incentive framework for businesses, governance, and political activity, and the lower the external shocks, given the initial level of per capita income. How can these results orient government policy? Governments cannot change the initial (current) level of per capita GDP, but they clearly can influence 2 See, for instance, Robert Barro, Determinants of Economic Growth: A Cross-Country Empirical Study (Cambridge, Mass.: MIT Press, 1997) and Robert Barro and Xavier Sala-i- Martin, Economic Growth (New York: McGraw-Hill, 1995), among others. 5 CARIBBEAN ECONOMIC OVERVIEW the second group of variables. In this sense, the reformns initiated by almost all countries in the region pointed in the right direction. Nevertheless, in most cases, they were either not completed or not supported by complementary actions from the government. Investments in education are one of the priorities for sustainable long-term growth. Empirical results for large samples of countries show that one extra year of (upper-level) educational attainrnent may raise per capita growth rates as much as 1 percentage point a year. By the same token, government action in the areas of regulation and liberalization of markets and enforcement of law and property rights, when appropriately undertaken, tends to create the right incentive framework for private sector activity. Finally, public intervention should be directed to stimulate (not substitute) the private sector, sending it the right signals through appropriate fiscal management. Economic Reforms and Growth Prospects Structural adjustments are not new in the Caribbean. Over the past decade, many countries undertook reform programs in different areas, reaching distinct stages of implementation. In terms of growth, however, the results were mixed, leading to a clear pattern: countries in more advanced stages of reform were the most successful in spurring growth, while others, lacking appropriate policy measures, lagged behind. Regarding macroeconomic stabilization, substantial progress was made. Inflation rates in 1996 were in single digits in most of the countries, while fiscal management improved, resulting in lower deficits. Given the trends of greater economic stability, smaller government deficits, and more open trade regimes in most Caribbean countries, what are the prospects for future growth? Although the reform and macroeconomic stabilization efforts are necessary conditions to create a more stable economic environment, they do not suffice to guarantee growth. In most countries of the region, an economic environment conducive to sustainable growth has yet to be achieved by deepening the initial reforms in some countries and adopting reforms in others. For instance, the trade liberalization process has not been completed and thus, has not yet had a strong effect on growth. This performance can be explained, in part, by the existence of significant market distortions in most Caribbean countries, where oligopolies of local trading companies still dominate the economy and the formulation of policies, discouraging new investment, and in particular foreign investment. Therefore, to achieve sustained economic growth in the region the respective governments ought to follow through their reform initiatives. They should also take action by fostering human capital development, correcting market distortions, strengthening the regulatory framework, and providing the 6 I Growth performance andfuture prospects necessary legal environment under which businesses operate. The significant inflow of foreign direct investment discussed in the next chapter may indicate that past reforms have adequately addressed some of these issues and started to produce the expected results. 7 2 Trends in Financing and Investment Flows The Caribbean region has benefited, in recent years, from the increase in net private financing flows generated by the expansion of international capital markets. Simultaneously, the composition of the flows changed significantly, altering the overall availability of resources to the region. This chapter summarizes the recent trends in external flows to the region, analyzes changes in their composition, and discusses their use by the recipient countries both as a group and individually. Financing Flows in the 1990s The well-documented decline in net official flows to the Caribbean since the early 1980s-due to the service of external obligations and a worldwide decrease in aid flows-imposed a substantial reduction in the resources available to these countries, especially because private flows only grew in importance after 1990.1 For this reason, in 1990 the region received about the same inflow of aggregate net resources that it had registered in 1985, and only in 1992 did total net transfers return to their 1985 level.2 Following the international trend of increasing private capital flows to developing countries, between 1990 and 1995 the resource inflow to the region doubled, reaching US$2.5 billion in 1995 (but falling to US$1.4 billion in 1996; Indeed, total debt service payments on long-term debt increased more than 50 percent between 1985 and 1990 as the principal on the heavy balance of payments lending of the 1980s started to come due. 2 Total net resource flows are defined as net disbursements of loans and net inflows of foreign direct investment, portfolio equity, and short-term capital. Total net transfers equal total net resource flows adjusted for the payment of interest on loans and profits on foreign direct and portfolio investment. CARIBBEAN ECONOMIC OVERVIEW table 2.1). 3 The prospects for the region to secure a sustainable inflow of external financing in the medium term depend on two factors: (a) continued expansion of international private direct investment and (b) ability of the region collectively, and of each country individually, to attract those flows by offering an adequate expected return to potential investors. Table 2.1 Net Financing Flows to CGCED Countries 7ype of Financing Flow (USS M 198S-90 1991 1992 1993 1994 1995 1996 Total Net Resource Flows 1,015 1,588 1,271 1,259 2,276 2,524 1,394 Total Net LT Resource Flows 2 968 1,652 1,115 1,323 1,948 1,930 1,600 Official Development Finance 650.2 1,302.8 489.9 638.9 783.1 951.7 481.6 Grants 439.2 881.0 405.0 693.0 1,031.0 1,055.0 625.0 Loans 211.0 421.8 84.9 -54.1 -247.9 -103.3 -143.4 Bilateral 131.2 129.0 17.2 -138.4 -178.7 -189.0 -230.5 Non-Concessional -23.7 -67.1 -41.0 -114.4 -129.9 -162.1 -237.1 Concessional 154.8 196.1 58.2 -24.0 -48.8 -26.9 6.6 Multilateral 79.9 292.8 67.7 84.3 -69.2 85.7 87.1 Non-Concessional -15.1 219.5 44.7 36.9 -91.9 -53.5 -106.9 Concessional 95.0 73.3 23.0 47.4 22.7 139.2 194.0 Total Private Flows 317.9 348.7 625.2 684.1 1,165.3 978.0 1,118.5 Debt Flows 40.7 -235.5 -166.2 -194.1 -98.0 -142.3 2.3 Commercial bank loans -48.6 -62.9 -120.3 -114.2 -133.7 -108.4 -110.1 Bonds 30.4 -84.1 1.2 14.4 152.7 47.2 172.9 Other 59.0 -88.5 -47.1 -94.3 -117.0 -81.1 -60.5 ForeignDirectlnvestment 277.2 584.2 791.4 878.2 1,263.3 1,120.3. 1,116.2 Short-Term Debt Net Flows 47.1 -63.3 155.4 -63.8 327.9 594.5 -206.0 Memorandum items: TotalNetTransfers3 -57.2 283.5 116.8 211.0 1,204.7 1,380.2 212.9 Workers'remittances, received 539.6 571.3 620.9 1,032.1 1,231.7 1,379.8 1,408.2 1 Excluding Antigua & Barbuda, Bahamas, and Suriname. 2 Includes IMF transactions. 3 Total Net Transfers equal Total Net Resource Flows minus the payments of interest on loans and profits on foreign direct and portfolio investment. Source: Global Development Finance database of the World Bank, World Bank staff estimates, and International Financial Statistics database of the International Monetary Fund. The first factor-the expansion of private international investment-is expected to prevail in the medium term even with the negative impact of the current financial crisis in East Asia. Those flows are highly correlated with, and are likely to be supported by: (a) strong growth of output and exports in developing countries, (b) furither expansion of integration and globalization, and (c) continued liberalization and reduction of investment controls. All three factors are anticipated to be met in the medium term. 3 Between 1990 and 1996 net resource flows to developing countries, the Latin America and Caribbean countries, and the East Asia region increased 200, 575, and 346 percent, respectively. 10 2 Trends in financing and investmentflows Therefore, the countries in the region must seize the opportunity to benefit from enhanced direct investment flows. In this respect, they ought to deepen structural reforms in the areas of trade policy, regulation, and public sector management so that the conditions for a private sector-led economy will be in place. Successfil implementation of this agenda would not only facilitate the transition from the traditional preferential-access exports to a more competitive system but also ease the reliance of governments and economies on official capital flows, aligning the need for financing with the available external private capital. Composition of Resource Flows The composition of resource flows also has evolved along the lines of international market trends, with official loans in particular and indebtedness in general quickly losing ground to official grants and private sector investment resources (figure 2.1). The real driving force behind the performance of private flows in the 1990s (which increased more than 280 percent) was foreign direct investment (FDI), which rose from about US$550 million in 1990 to US$1.1 billion in 1996. Figure 2.1 Net Long-term Resource Flows (US$ million) 1,500 . . . ......... 'soo . 1986 1988 1990 1992 -500 . . . .. . -+-off grants -0-off loans-FDI Foreign direct investment has been crucial to some countries, while grants have been more important for others. For the region, during 1990-96, both sources rivaled in importance, with FDI increasing US$900 million a year, on average, and grants increasing about US$740 million. The countries that relied more heavily on grants were Belize, Guyana, Haiti, and Jamaica, for which the average flow of grants surpassed investment. Haiti, however, is the only case in which there is a large gap between grants and FDI due to a critical lack of investors' confidence.4 The largest recipients of foreign investment in the 1990- 96 period were Trinidad and Tobago (average of US$280 million), the Dominican Republic (US$260 million), and Jamaica (US$140 million). These three countries together received 76 percent of the US$900 million invested in the region. 4 The annual average of foreign direct investment was negligible in the 1990s. 11 CARIBBEAN ECONOMIC OVER VIEW Workers' remittances have also constituted an important source of external financing to the Caribbean region due to the large population of immigrants from these countries. In the period 1993-96, total workers' remittances receipts averaged US$1.3 billion, which is significant by international standards.5 The offsetting of official flows by increased foreign private investment could have two major benefits. First, it tends to enhance the growth potential of the economy because private investnent is likely to be more efficient than public sector investment. Second, it lessens the transfer of real resources abroad that is imposed by the service of debt obligations. Net flows from official loans have continued to exhibit a downward tendency (turning negative after 1992), with the strongest decline coming from bilateral loans. Moreover, commercial lending to the public sector has largely ceased, leaving negative net flows for the governments that borrowed in the past. For the Caribbean governments, the reversal of credit financing flows from official loans and comfnercial sources accounts for most of the aggregate decline of their external financing. Official flows, however, drifted toward grants and concessional lending (especially from multilateral institutions), which, as mentioned, further limits the transfer of resources to creditors in the future. Grants assumed an important role in the 1990s, increasing twofold between 1990 and 1995, when they reached US$ 1.1 billion. Short-term debt has also increased in the 1990s to an average of US$124 million a year between 1991-96, compared with US$47 million for the 1985-90 period. The highest point occurred in 1995, when the flow grew to almost US$600 million and the stock reached US$2.3 billion, but it was somewhat reversed in 1996, with a loss of US$200 million. These fluctuations, however, have not altered the stock-to-GDP ratio of the region, which has been stable at around 6 to 7 percent. By the very nature of short-term flows, individual countries have experienced wide variation over time, although in almost all cases the highest inflows occurred in 1994-96 and were quickly reversed in 1996. In the larger countries of the region-the Dominican Republic, Jamaica, and Trinidad and Tobago-and in St. Vincent, in relative terms, the inflows were substantial, although much was lost in the immediate reversal. Total net transfers also evolved in favor of the region in the 1990s, averaging US$570 million from 1991 through 1996, up US$620 million relative to the annual average of the previous five years. This positive balance was the result of stable payments coupled with increasing net resource flows. 5 This amount represented 42 percent of the receipts by least-developed countries, 18 percent by upper-middle-income countries, 14 percent by Latin America and the Caribbean countries, 10 percent by low-income countries, and 4.4 percent by middle-income countries. 12 2 Trends in financing and investmentflows Financing Investment The resources available to the region, in general, are not being used to finance consumption, because foreign savings (the difference between gross domestic investment-GDI-and gross national savings-GNS) as a share of GDP have shown a declining trend since 1991. After 1994 foreign savings to the region increased, but in tandem with an expansion in both investment and national savings. National savings (figure 2.2) have financed an increasing share of investment, reaching 90 percent in 1994, up from 67 percent in 1991, before declining to 78 percent in 1996. The higher participation of national savings indicates that the economies of the region adjusted to the restricted official flows of the 1980s by mobilizing more resources domestically, that is, cutting fiscal deficits and exploring alternative sources of financing such as grants. Figure 2.2 Investment Financing (% of GDP) 14. = .... .... .... 2 1 10 0 1986 1988 1990 1992 1994 1996 -.----GNS GDI-_ - FDI The behavior of gross domestic investment, however, has been disappointing given the availability of external financing. After reaching 21.6 percent of GDP in 1987, it declined to 16.7 percent in 1992. By 1996 the investment ratio returned to 20.7 percent of GDP, the same level as in 1989. In the meantime, between 1987 and 1994, foreign direct investment flows increased 3 percentage points of GDP, to 4.5 percent, before losing I point in a trend reversal. Therefore, foreign investment might be partly substituting for national investment (investment by residents).6 6 The two concepts, GDI and FDI, are not directly comparable. While GDI comes from the national income accounts and covers only new additions to the stock of capital, FDI comes from the balance of payments and may include the acquisition of both new and old (second- hand) investment goods. Hence, an increase in FDI will not result in a corresponding rise in GDI whenever only "preexisting" capital goods are purchased by non-residents. 13 CARIBBEAN ECONOMC OVERVIEW Investment trends in many of the Caribbean countries do not reveal a clear tendency, except for the cases of Guyana, Barbados, and Trinidad and Tobago, for which there is a declining trend. In Guyana the combination of high growth rates (7.2 percent a year from 1991 through 1997) with a falling investment ratio reflects improvements in productivity through the elimination of inefficient investment. Barbados and Trinidad and Tobago have experienced very low average growth rates (0.8 and 2.1 percent, respectively, between 1991 and 1997) caused by the combination of low ratios of investment to GDP and low- productivity investment. Flows to Individual Countries Because the Caribbean region congregates countries with very diverse characteristics, the impact of changes in external financing flows on any particular country can be expected to differ from the impact on the others. Nonetheless, countries can be split, for the sake of simplicity, into two economic subgroups: small economies and large economies. Small economies have very small populations (OECS), very low per capita income (Guyana, Haiti, and Suriname), or small populations and middle income (Belize). Larger economies, in contrast, have either middle income per capita and relatively large populations (Dominican Republic, Jamaica, and Trinidad and Tobago) or small populations with high per capita incomes (Bahamas and Barbados).7 Small economies. Small economies still receive positive flows from official sources. These flows are substantial, in per capita terms, and have remained relatively stable over the past decade (figure 2.3). Moreover, private capital flows to these countries have grown, fueled by substantial inflows of FDI (annual average of US$240 million in 1990s) and private transfers (remittances). For St. Kitts and Nevis, St. Lucia, and St. Vincent and the Grenadines, official credit flows have remained positive. These governments have resorted to grants (representing 73 percent of the official flows in 1990-96) and to concessional-term borrowing (that reached 85 percent of the average net flow of official loans in 1990-96). The private sector in the islands has also received substantial inflows of direct investment. The other OECS countries and Belize followed a similar pattern, although they have managed less well. Governments in Belize, Dominica, and Grenada relied less on concessional borrowing (averaging 60 percent of the flows of official loans in 1990-96) than 7 These countries are all small by conventional standards. The smallest "large" economy- Barbados, with a GDP for 1996 around US$2.0 billion-is about the same size as the largest "smalr' economy-Haiti, with a GDP of about US$2.8 billion. However, they each belong to a diverse group in terms of patterns of capital flows. The extremes are far apart-Dominican Republic with a GDP of US$13.2 billion and Dominica with US$230 million. 14 2 Trends infinancing and investmentflows the previous group and received about the same level of official grants (with a similar share in total official flows). Furthermore, foreign direct investment to these three countries has been about 40 percent lower than to the other OECS countries. In Antigua and Barbuda, the government is still running arrears, despite its success in rescheduling about 60 percent of the stock outstanding by end-1996. The lesson emerging from this group is not new. These small economies are too vulnerable to allow the government much borrowing on commercial terms or much guaranteeing of private borrowing, which is where most of Antigua's arrears originated. With proper fiscal management, none of these governments should have needed to borrow commercially, because they were all receiving well over US$100 per capita per year (on average US$170 per capita) in total aid flows8 in 1993-95 (Antigua and Barbuda received about US$50 per capita in those years). Figure 2.3 Investment Financing in "Small" Economies (% GDP) 25 --------- ----- 20 2-0._ -15 15. s;+t - ---*...sws. 10 10 - -- - f-5 5 0 1986 1988 1990 1992 1994 1996 |-----GNS GDI - -*- - FS I In Guyana, net official flows have remained positive despite external debt stock and accrued debt service ratios that are the highest in the region and among the highest in the world. Rescheduling of old obligations that were on commercial terms and new concessional lending and grants have made this possible. Debt forgiveness, counted as grants, amounted to US$114 million in 1991, but was not significant again until 1996. The recently approved HIPC (Heavily Indebted Poor Countries) assistance estimated at about US$253 million will bring further debt relief when completed. Haiti has recently been the country receiving the highest net official flows, almost all in the form of grants. Nevertheless, due to Haiti's large population, aid flows averaged only US$70 per capita in 1993-95. Official credit flows ceased in the early 1990s, because the country was not creditworthy and did not repay 8 Includes, among others, net disbursements of loans and grants made on concessional terms. 15 CARIBBEAN ECONOMIC O VER VIE W principal on old loans. However, after the governnent cleared arrears with multilateral institutions in December 1994, lending on concessional terms started to grow along with grants. Hence, official financing averaged around US$650 million in 1994-96 (US$511 million in grants and US$57 million in concessional loans) compared with US$165 million in 1990-93. In Suriname positive flows of official grants and private transfers continued through the early 1990s, but there was virtually no lending until recently. Creditworthiness was an issue, given the lack of an appropriate macroeconomic framework. In Suriname, net foreign direct investment was actually negative in the early 1990s. Large economies. Large economies have had low or negative official flows in the 1990s, but large positive private flows. Not surprisingly the experience of the large economies dominates the aggregate figures. Figure 2.4 Investment Financing in "Large" Economies (% GDP) 25------- --- - - ------------------------ -- ---- -7 20-. --- -- - -- -- - -- - 10 -1 1986 1988 1990 1992 1994 1996 --GNS GDIl - FS Net flows to the Dominican Republic have followed an increasing trend over the past few years, with net long-term flows virtually doubling in the 1990s. Official flows declined in 1993 and 1996, as the net lending flow became negative and grants stayed around US$100 million. Increased flows to the private sector outpaced the decline in official flows, as FDI rose by US$260 million between 1990 and 1996 to reach US$400 million in 1996. Net flows to Jamaica have been unstable and cyclical (experiencing sharp successive reversals) during the past decade. Nonetheless, flows have followed a slowly upward trend, shown by the increase of about US$100 million in the annual average for 1992-96 relative to the average for 1986-90. Official lending flows were negative for most of the past decade and became more negative in the last few years,9 whereas grants averaged US$170 million in the 1990-96. Foreign 9 The Paris Club rescheduling, the Extended Fund Facility, and adjustment lending from the World Bank all ended in late 1995, contributing to turn official flows more negative. 16 2 Trends in financing and investmentflows direct investment has been sluggish, especially in comparison with similar countries in the region. Figure 2.5 Foreign Direct Investment (% GDP) 42 ----- - -e - 2 . . . . . . X-,-,- --,-.-.-.- 0I 1986 1988 1990 1992 1994 1996 |---large small Trinidad and Tobago has had only small net flows of official loans and grants in the 1990s. The flows to the private sector have boomed, however, led by foreign direct investment, which has tripled, rising from an annual average of US$134 million in 1988-92 to US$320 million in 1996.10 This investment has been directed mainly to the oil and gas sector. Barbados completed most of its structural adjustment in the early 1990s, changing its liability profile. Private inflows have been dominant in 1994-95, driven by foreign direct investment, relative to negative official net flows- because the country is repaying past public borrowing and receiving little in grant assistance. The government sector in the Caribbean faces the medium-term challenge of raising public savings enough to sustain its investment while fully servicing (including amortization) its debt. Appropriate public sector investment programs are also necessary to obtain the mix of investments that will best serve the economy and that will be sustainable, considering the recurrent expenditures needed to maintain and operate the stock of capital. ° In 1994 FDI topped US$516 million. 17 CARIBBEANECONOMIC OVERVIEW Table 2.2 Overview of Net External Financing to CGCED Countries, 1996 (current US$ millions) Antigual Dominican Si Kittsl St. St. Vincentl Trinidadl Type offinancing Barbudaa Bahamas Barbados Belize Dominica Republic Grenada Guyana Haiti Jamaica Nevis Lucia Grenadines Surinamea Tobago CGCED Total nt long-Mm resource 3.0 116.1 34.2 51.2 45.4 401.3 24.0 152.6 257.8 107.2 21.7 81.5 40.7 51.0 323.8 1,711.5 flow Official finance -18.0 23.8 35.3 30.1 26.4 35.4 4.8 70.0 253.7 -83.9 6.2 42.5 21.7 72.0 -19.3 500.7 Grants 4.0 20.0 2.0 3.0 23.0 55.0 5.0 37.0 158.0 40.0 2.0 29.0 21.0 67.0 7.0 473.0 Loans -23.0 3.8 33.3 27.1 3.4 -19.6 -0.2 33.0 95.7 -123.9 4.2 13.5 0.7 4.0 -26.3 25.7 Bilateral 0.0 -3.6 -4.2 24.0 2.5 -50.6 0.7 -17.0 4.9 -87.4 1.2 2.7 2.9 1.0 -110.2 -233.1 Concessional - - -2.9 -2.6 0.0 -14.3 -2.3 -8.0 -0.1 -98.1 -0.3 -2.0 -0.4 - -106.1 -237.1 Nonconcessional - - -1.3 26.6 2.5 -36.3 3.0 -9.0 5.0 10.7 1.5 4.7 3.3 - -4.1 6.6 Multilateral -5.0 7.4 37.5 3.1 0.9 31.0 -0.9 50.0 90.8 -36.5 3.0 10.8 -2.2 -5.0 83.9 268.8 Concessional - - 26.1 5.2 0.7 7.7 0.2 -16.5 0.0 -35.0 -0.1 5.8 -0.9 - 84.2 77.4 Nonconcessional - - 11.4 -2.1 0.2 23.3 -1.1 66.5 90.8 -1.5 3.1 5.0 -1.3 - -0.3 194.0 Totalprivateflows 21.0 - -1.1 21.1 19.0 365.9 19.2 82.6 4.1 191.1 15.5 39.0 19.0 -21.0 343.1 1,118.5 Debtflows - -22.1 -14.1 6.1 0.0 -28.2 -0.8 1.6 0.0 16.1 -1.5 0.0 0.0 - 23.1 -19.8 Commercial bank loans -1.0 - -7.1 9.0 0.0 -9.0 -0.1 6.7 0.0 -28.6 0.0 0.0 0.0 - -81.0 -111.1 Bonds - - -4.6 0.0 0.0 0.0 0.0 0.0 0.0 52.5 0.0 0.0 0.0 - 125.0 172.9 Other - - -2.4 -2.9 0.0 -19.2 -0.7 -5.1 0.0 -7.8 -1.5 0.0 0.0 - -20.9 -60.5 Foreign direct investment 22.0 87.5 13.0 15.0 19.0 394.1 20.0 81.0 4.1 175.0 17.0 39.0 19.0 -21.0 320.0 1,204.7 -Not available. a. 1993-95. Sources: Global Development Finance database of the World Bank, World Bank staff estimates, and Intemational Financial Statistics database of the Intemational Monetary Fund. Annex Summary indicators and country profiles Table A 1 Summary of Economic Indicators of Caribbean Countries (US$ mill) (1996, unless otherwise noted) Andga Dominican St. Kilts St. St. Vincent Tr2W d& All lndicator Barbuda Bamaa Barbados Belize Domhica Republic Grenada Guyana Haiti Jamaica & Nevis Lucia & the Surinme Tobao Couries Grenares Population (thousands) 1 66 289 265 230 75 8,100 99 725 7,500 2,600 41 150 112 430 1,300 21,872 GNP per capita 1,2 7,380 11,105 6,837 2,740 3,120 1,670 3,000 S50 330 1,560 6,160 3,620 2,500 1,200 4,230 3,851 GDPm.p. (1990UUS$) 480 1,535 1,814 526 197 10,081 255 645 2,207 4,290 182 502 247 1,933 5,837 30,729 GDP growth (percentage) 1997 4.8 3.0 2.9 3.8 3.1 8.2 3.6 7.0 1.1 -2.4 5.0 3.5 5.0 5.6 4.1 42 1996 5.8 4.2 5.2 1.4 3.2 7.3 3.5 7.9 2.8 -1.8 5.8 3.8 3.0 3.0 3.5 4.0 1995 4.2 0.3 2.7 3.9 1.8 4.8 2.7 5.0 4.4 0.5 3.7 4.1 7.4 5.0 3.8 3.2 lnflation(CPI;*) 1 1.6 0.5 7.7 1.0 2.4 8.3 1.1 4.0 20.6 9.7 2.5 3.0 0.4 7.1 3.9 - Pop. in povrty(%) 12.0 5.0 8.0 35.0 33.0 .. 20.0 43.0 - 34.0 15.0 19.0 17.0 39.0 21.0 Unemploymentrate(w/6 7.0 15.0 16.4 11.1 10.0 30.0 16.0 11.0 - 16.2 12.0 16.0 20.0 16.0 16.0 - Exports,GNFS 422 1,888 1,247 290 115 3,936 132 743 192 3,275 120 406 145 543 2,900 16,352 XGNFS(%ofGDP) 77.6 57.6 62.5 47.9 50.1 29.9 44.3 36.9 6.9 60.1 48.5 67.9 51.9 102.6 53.1 43.6 Sugar 3 - - 32 48 - 87 - 127 - 95 - - - - 38 - Bananas3 - - - 22 16 - I - - 48 - 66 22 - - - Bauxite,Minemrls,fuel3 - - - - 273 - 178 - 723 - - - 334 910 - Otherdomeatic3,4 39 - 137 95 26 383 22 175 86 516 23 53 38 99 1,189 - Touism Receipts 354 1,378 712 75 30 1,755 59 46 81 1,092 297 251 58 14 74 6,276 NFPS balance -21 -46 -36 -16 -3 -132 -4 -99 -69 -316 -11 -48 3 4 -87 -879 NFPS bal.(% of GDP) -3.8 -1.4 -1.8 -2.6 -1.1 -1.0 -1.4 -4.9 -2.5 -5.8 *4.3 8.0 1.1 0.8 -1.6 -2.3 Cunretaccountbalance 40 -246 103 -17 40 -110 -58 -66 -138 -236 -65 40 -20 66 97 448 CAB(%ofGDP) -7.3 -7.5 5.2 -2.8 -17.4 -0.8 -19.5 -3.3 -5.0 -4.3 -26.2 -13.4 -7.0 12.6 1.8 -23 TotalDOD 436 290 581 288 111 4,310 120 1,631 897 4,041 58 142 213 217 2,242 15,577 DOD(%ofGDP) 802 8.9 29.2 47.5 48.1 32.7 40.4 81.1 32.4 74.2 23.6 23.8 76.1 40.9 41.0 41.6 DOD (ofXGNFS) 103A 15.4 46.6 99.2 96.1 109.5 91.3 219.6 468.2 123.4 48.6 35.0 146.6 39.9 77.3 95.3 - Not available. Note: GNP, grsa natinual product; GNFS, goods and nonfactor services; XGNFS, exports of goods and nonfactor services; DOD, debt outstanding and disbursed; NFPS, non-financial public sector; CAB, curent account balance. Poverty and unemployment esima come from various sources and may not be comparable. 1 1997 2 ONM per capita calculated by Atlas Method. 3 1995 4 Incudes re-exports Soure: oridDevelopmenIndicators oabase amd Globaf Development Fiance dababe of die WoridBasA WorldB aD staffestimates, and imenoatianal Finmcial Staltics database of tie International Monetarwy Fiod Annex ANTIGUA AND BARBUDA Population: 66,000 (mid-1997) GNP per capita: US$7,380 (1997 Atlas methodology) The economy Real GDP growth was more than 5 percent a year during the 1980s on account of the rapid expansion of tourism, which was fueled by foreign direct investment and supported by adequate public investment. Over the period, the central government and public enterprises (mostly hotels and tourist resorts) recorded large deficits, which were financed by commercial borrowing and the accumulation of external arrears. In the early 1990s, growth slowed to less than 3 percent a year following a sharp decrease in public and private investInent and a continuation of lax financial policies, but the pace of the GDP growth picked up in 1996 and 1997 (5.8 and 4.8 percent, respectively). Fiscal imbalances and high levels of external debt are the main issues facing the Government of Antigua and Barbuda. Although economic growth increased over the past two years, expansionary policies resulted in unsustainable deficits. The home-grown structural adjustment program resulted in some increase in recurrent revenue but did not have a significant impact on recurrent expenditure. Nonwage recurrent expenditure rose very rapidly in 1997, while a wage freeze held down wage. expenditures. In 1997 the government's overall deficit widened to 6 percent of GDP from 3 percent in 1996. In 1998 the overall deficit is expected to increase to 8.7 percent of GDP. This increase is expected to be financed by domestic borrowing and lower payments on external debt service. Policy issues 1. Debt management and fiscal stabilization. The accumulation of arrears on external debt repayments has adversely affected the government's access to external sources of funds to finance the public sector investment program. The government is not willing to enter into a Club of Paris multilateral arrangement to reschedule its external debts and obtain debt write-offs, instead favoring the bilateral approach. In 1997 and early 1998, the government was able to reschedule a Japanese loan of $56 million (including arrears) and six Italian loans totaling $215 million. The renegotiation of these loans settled $267 million of arrears on external debt, but $135 million remains. To regain investors' confidence and turn the situation around, the government must act swifly to improve its fiscal performance and public investment. It needs to enact fiscal revenue measures and privatization, reduce current expenditures, and improve debt management. 23 CARIBBEAN ECONOMIC OVER VIEVW 2. Competitiveness. Competitiveness as a tourist destination needs to be improved because Antigua and Barbuda is rapidly becoming one of the more expensive destinations in the Caribbean. Trade liberalization needs to be advanced rapidly by reducing import tariffs to the 5-20 percent range mandated by the Caribbean Community Secretariat (CARICOM) and by eliminating quantitative restrictions. Given the country's membership in the Eastern Caribbean Monetary Union, increasing competitiveness calls for wage discipline. Trade liberalization needs to be accompanied by measures to strengthen public finances. 3. Environmental management. Antigua and Barbuda has a very fragile ecosystem. However, there are clear indications that degradation of the coastal zone particularly the beaches) is taking place. If unchecked, this degradation is likely to have an adverse impact on the tourism industry. Solid waste and sewage disposal have also been problems. Investments in sewage facilities, waste management, water treatment, and coastal zone protection, which are assigned the highest priority, should be continued. 24 Annex BELIZE Population: 230,000 (mid-1997) GNP per capita: US$2,740 (1997 Atlas methodology) The economy Following rapid growth of about 10 percent a year during 1986-90, growth slowed to about 3 percent a year during 1991-97 as a result of deteriorating macro management, in particular fiscal management, the slow pace of trade liberalization, and the uncertainty of the preferential trade arrangements in sugar, bananas, and citrus. The appreciation in the real exchange rate is contributing to an erosion of international competitiveness. Tourist arrivals declined during 1995-97 in part due to the depreciating Mexican peso, which made Mexico more attractive to tourists. The government gradually reduced the overall consolidated public sector deficit from about 7 percent of GDP in 1993 to 1.7 percent at end-March 1997 through measures such as the value added tax, retrenchment of about 10 percent of government employees, and elimination of some import duty exemptions. However, expansive fiscal policy during the past year has widened the consolidated public sector deficit to 5.5 percent of GDP at end-March 1998. Given that elections have to be held in 1998 and wage increases to government employees have been agreed, it is likely that there will be further slippage in the management of public finances. Tight monetary policy is over-compensating for the loose fiscal policy, thereby increasing interest rates and crowding out private investment and production. There is mounting pressure on the nominal exchange rate. External borrowing significantly increased during the past two years. Policy issues 1. Fiscal discipline. Although the government has made progress with some important fiscal measures over the last several years, it should move rapidly in undertaking public sector reform, in particular in broadening the tax base and strengthening tax enforcement, streamlining the many ministries, and eliminating discretionary exemptions. The government has secured a U.K. loan to reform financial management, which could have some positive impact. 2. Incentive framework Private sector development is constrained by uncertainties in the political situation, macro policy, high cost of capital and utilities (in particular telecommunications and power), and erosion of the preferential trade arrangements with the European Union and with the Caribbean Basin Initiative. There is a need to continue reducing the common 25 CARIBBEAN ECONOMIC OVERVIEW external tariff as agreed with other CARICOM countries, to eliminate trade restrictions, and to regulate the monopolistic practices of utilities. 3. Infrastructure and human resource development. The country needs to develop its system of roads, bridges, and water and power distribution. The quality of and access to basic education need to be improved, while addressing issues pertaining to education financing and student-teacher ratios. The efficiency and rural coverage of health services need to be improved. 4. Poverty reduction and social development. Unemployment and poverty appear to have increased in recent years. The speedy implementation of the Social Investment Fund will help in this area. Several nongovernmental organizations and private sector representatives consider land titling important (as collateral for credit) to stimulate production and encourage small businesses. There is a need for the government to accelerate land reform and develop an immigration policy because social tensions are surfacing around these issues. 5. Environmental protection. Consolidated efforts are needed to address issues involving land use, deforestation, over-fishing, and solid and liquid waste management. The recommendations of the National Environmental Action Plan and the Environmental Report of 1996 need to be implemented. 26 Anr DOMINICA Population: 75,000 (mid-1997) GNP per capita: US$3,120 (1997 Atlas methodology) The economy Rapid increases in the price and volume of banana exports and high levels of aid flows during the 1980s enabled Dominica to grow rapidly, albeit unevenly. During the 1990-95 period, annual real GDP growth slowed to 2 percent, compared with about 4 percent during 1980-90. GDP grew 3.2 percent in 1996 and 3.1 percent in 1997. The major issue for Dominica is the diversification of its economy in response to the WTO's decision on bananas and the resulting difficulties facing its banana industry. The government is pursuing a number of options. These include tourism development, the expansion of nonbanana agriculture, export services, fisheries, and floriculture. In the case of tourism, a major constraint is the inadequacy of airport facilities. Expansion of nonbanana agriculture will also require additional infrastructure in transportation and investment in processing and marketing. Policy issues 1. Public finances. In order implement an economic diversification program, the Government of Dominica must increase public sector savings. Unfortunately, progress has been slow in this area. Several options are available to the government with respect to both revenue generation and expenditure reduction. Initiatives on either side have been few and implementation less than satisfactory. Currently, there is discussion with the European Union for budgetary support, and there is the danger that necessary fiscal adjustments will be postponed, especially given the fact that European Union support will be temporary. 2. Private sector. The government will need to complement its own initiatives with those of the private sector in order to accelerate the diversification process. To achieve this, the government must ensure an appropriate macroeconomic and policy environment to stimulate investments by the local and foreign private sector. Important initiatives in this regard include price and trade liberalization, an appropriate incentive regime, a low and stable tax rate, and a comprehensive, long-term human resource development policy. 3. Environmental management. Development of ecotourism requires increased efforts to conserve the environment. Investments in sewage facilities, waste management, water treatment, and coastal zone protection, which are assigned the highest priority, need to be continued. 27 CARIBBEAN ECONOMIC OVERVIEW 4. Banana industry. In the 1980s, agriculture (mainly bananas) accounted for one-fifth of GDP, half of merchandise exports, and close to one-third of employment; the sector remains very important. The 1993 European Union banana regime resulted in an estimated 20 percent decline in unit banana eamnings, and the 1997 WTO decision on bananas imported from the Windward Islands will exacerbate the situation. The banana industry must undergo significant restructuring in order to increase efficiency and improve product quality if prod-cers are to compete successfully. Social safety nets will need to be put in place during the transition because a significant percentage of the population is already living below or near the poverty line. 28 Annex DOMINICAN REPUBLIC Population: 8.1 million (1997) GNP per capita: US$1,670 (1997 Atlas methodology) The economy Following the adjustment process initiated in 1990, economic performance in the Dominican Republic continues to be strong. Economic growth of 7.3 percent in 1996 and 8.2 percent in 1997 continues to be based on tourism, construction, and telecommunications, which are growing at rates in excess of 10 percent a year. The prospects for economic growth in the next three years remain strong. Internal and extemal balances remain within acceptable ranges. On the external front, a rising trade deficit has been broadly offset by tourism earnings, which now exceed US$2 billion a year, and growth in the free trade zones, which host more than 400 companies, employ 200,000 people, and have annual net exports of almost US$1 billion. In 1997 foreign direct investment grew more than 20 percent to US$400 million, and the current account deficit reached 1.5 percent of GDP. On the fiscal side, the 1997 consolidated fiscal deficit of 0.5 percent of GDP was achieved based on strong revenues, which grew 31 percent in 1997. Despite higher revenues, the public investment program is being used largely to finance salary increases. Despite improvements in macroeconomic management, social indicators remain weak. More than 25 percent of Dominicans are poor, with the largest concentration living in rural areas. After years of very low spending, social indicators are low compared with countries at a similar stage of development, and service delivery is beset by the excessive centralization that characterizes the state. A limited number of programs provide safety nets. The government is carrying out an ambitious effort to increase public expenditures in health and education. In 1997 public expenditures in education increased to 2.5 percent of GDP. However, the modernization of existing structures to improve service delivery remains a key challenge. The Dominican Republic has recently joined Central America in a regional trade integration treaty. Policy issues 1. Trade liberalization and domestic deregulation. The Dominican Republic still has the highest rates of protection in the region, taxing poor consumers and stifling nonenclave exports. Domestic prices remain severely distorted by 29 CARIBBEANECONOMIC OVERVIEW discretionary behavior of the customs administration and nontariff interventions in trade. These distortions need to be reduced in order to provide an incentive framework for efficient growth. 2. Fiscal management. The government needs to follow through on the implementation of reform programs to (a) improve budget allocation and budget management procedures, (b) implement tax reform consistent with a trade liberalization program, and (c) improve prudential regulations in the banking sector through continued strengthening of the Superintendency of Banks. 3. Modernization of public enterprises. Privatization of electricity generation and distribution is scheduled for the end of 1998. Successful implementation of this process is critical for sustained growth of the economy, which suffers from an insufficient and unreliable supply of electricity. Privatization and divestments of assets are also necessary for the important sugar sector. 4. Quality and efficiency of government expenditures. The administration of public resources remains highly centralized. The majority of resources are still administered directly from the Presidency. Despite growing attention to human development issues, important institutional reforms are pending to increase local community and beneficiary participation in the delivery of services. 5. Environmental protection. Environmental protection efforts need to be consolidated and expanded, especially to address the issues of deforestation and waste management. 30 Annex GRENADA Population: 99,000 (mid-1997) GNP per capita: US$3,000 (1997 Atlas methodology) The economy Grenada's economic performance has continued to improve in the last two years, following low and negative growth rates during the early 1990s. The GDP grew at annual rate of 3.6 percent in 1997. Beginning in 1992, the government implemented a "home-grown adjustnent program" with the assistance of regional institutions and frequent monitoring by the International Monetary Fund (IMF) and the World Bank. Between 1991 and 1995, the overall public sector balance improved from negative 9 percent of GDP to a small surplus in 1993 and in 1995. In 1996 the overall government deficit of 1.4 percent of GDP widened to 2.3 percent and is expected to reach 3.5 percent in 1998 unless there is a fall in capital expenditure. The Government of Grenada has not been able to generate an adequate public sector surplus to finance the counterpart requirement for the public sector investment program for the past several years. This fall in the recurrent account surplus stems from an increase in the income tax threshold in 1996 and from a rise in the wage bill and in current transfers, despite a reduction in the size of the civil service and privatization of the electricity company, state- owned bank, and other small public entities. The external debt service ratio is expected to increase from 6.5 percent of exports of goods and nonfactor services to about 8 percent in the year 2000. Overall, though, external debt, because of its concessionary nature, is expected to remain manageable. Policy issues 1. Unemployment. The rate of unemployment was an estimated 15.5 percent in 1997, down from 29.1 percent in 1994. Tourism and information-processing services, fueled by foreign direct investment, have been the main sources of employment growth. However, these figures should be treated with caution. Nevertheless, unemployment remains high, and the government needs to ensure private sector-led growth by reorienting the priorities of its public sector investment program. Furthermore, the government should take action aimed at reducing the rigidities of the labor market. 2. Water resources. During the dry season, the southern area of Grenada suffers from severe water shortages. This area also has the greatest concentration of economic activity (including most of the hotels), and water has to be transported by truck to various business establishments. This increases the operating costs of most businesses operating in the area and affects the overall competitiveness of the economy. The govemment is taking some action to 31 CARIBBEAN ECONOMIC OVERVIEW deal with this problem and has developed a master plan for the southern water sector. 3. Environmental protection. The Government of Grenada, being aware of the need to achieve higher rates of economic growth while protecting its environment, has developed a National Environmental Action Plan that identifies priority issues with respect to the environment. It is also moving forward with the implementation of a solid waste management project and a Global Environment Facility-ffmanced Grenada Dove restoration plan. However, with clear signs of degradation of the coastal zone, the tourism sector could be affected. 32 Annex GUYANA Population: 725,000 (mid-1997) GNP per capita: US$850 (1997 Atlas methodology) The economy Since 1988, Guyana has established a track record in implementing macroeconomic stabilization and structural reform programs, supported by IDA, IMF, and other external agencies. Before embarking on this reform program, Guyana faced declining investment, high unemployment, negative growth, increasing poverty, and deteriorating economic infrastructure. Guyana has successfully implemented economic reforms and made significant progress toward achieving the government's macroeconomic and economic restructuring objectives. Real GDP growth has averaged about 6 percent a year since 1992. Substantial reduction in the overall fiscal deficit has been complemented by reduction in the size of the public sector, tax reform, expenditure controls, and privatization of public enterprises. The foreign exchange and trade system has been liberalized significantly, and the incentive framework for the private sector has been improved considerably. Satisfactory progress in implementing the Private Sector Development Adjustment Credit has been made. Notwithstanding this positive track record, much remains to be done. Guyana should be given credit for political developments occurring during the 1990s. It has moved toward democracy and is making efforts to improve governance by promoting greater participation of the civil society. However, the post-election political disturbances during December 1997 and January 1998 and the reduced output of rice and sugar since late-1997, due to drought conditions related to El Nino, have adversely affected overall economic activity and tax collections. At the end of 1997, Guyana had a total external debt of US$1.6 billion, most of which is owed to multilateral agencies. Debt to commercial creditors amounted to US$65 million. The debt service ratio exceeded 20 percent in 1992 and, since then, has fallen as a result of the bilateral debt relief and 1992 IDA debt reduction operation. With support from the Canadian International Development Association, IDA staff are preparing a follow-up IDA debt reduction operation in 1998. In December 1997, the boards of IMF and IDA approved HIPC assistance estimated at about US$253 million with a one-year completion point of December 1998 subject to full implementation of macro and structural measures. 33 CARIBBEAN ECONOMIC OVER VIEW Policy issues 1. Fiscal discipline. Continued fiscal discipline is critical to maintaining a sound macroeconomic and incentive framework. There is a need to broaden the tax base, simplify taxes, reduce tax-and-tariff exemptions, and improve tax and customs administration. 2. Public sector reform. The government has accelerated its privatization program during the past two years and has moved to update the regulatory frameworks in the financial sector, energy, telecommunications, and sugar sector. However, limited public administration capacity has contributed to slow, albeit steady, implementation of the structural reform agenda and to problems of debt management. Furthermore, there is considerable room to improve the level and efficiency of public expenditures toward the social sectors. The agenda for reforms includes reforming the financial sector, restructuring and bringing to a point of sale all remaining public entities, including the sugar company, reforming the civil service, improving information systems, strengthening the delivery of social services, and improving the targeting of poverty programs. 3. Poverty reduction. With almost half of the population estimated to have incomes below the poverty line, and with the large devaluation adversely affecting the poorest, protection of vulnerable groups through social programs, such as the Social Impact Amelioration Program, continues to be assigned high priority. There is a need to improve the targeting of social programs to the poorer communities. 4. Social sector reforms. In education, there is a need to strengthen the institutional capacity of the Ministry of Education by restructuring the ministry and upgrading human resources. Increasing the budgetary allocations to the sector is needed, particularly for buying materials and maintaining schools, hiring and training additional teachers, developing youth skills, and upgrading information systems. In health, there is a need to strengthen the institutional capacity of the Ministry of Health by restructuring it, training health personnel, and improving health services through budgetary allocations for primary and preventive services, prescription drugs, medical supplies, and maintenance. 5. Environmental protection. Environmental protection needs to be stepped up, especially to address forestry management, mining and land use management, and waste management. For the Iwokrama Initiative, the government has allocated a large area of rain forest for external agencies to manage on a sustainable basis. A Global Environment Facility-financed national parks and protected areas project is also under preparation. 34 Annex HAITI Population: 7.5 million (1997) GNP per capita: US$330 (1997 Atlas methodology) The economy During the three years following the coup d'etat in September 1991, economic mismanagement and an international embargo led to a dramatic decline in living standards. From 1992 to 1994, the deterioration in economic performance accelerated. Real GDP fell almost 20 percent in 1992-93 and a further 10 percent in 1994. Agricultural production and exports decreased considerably, with the latter severely affected by the embargo. Fiscal performance deteriorated, mainly due to a sharp decrease in tax revenues. Government revenues declined from some 8 percent of GDP in 1991 to about 3 percent in 1994. When the constitutional government returned to power in October 1994, it pursued a program of fiscal stabilization and structural reforms. In December 1994 the government cleared arrears to the IDA, Inter-American Development Bank (IDB), and IMF, allowing these institutions to resume lending activities, and in March 1995 it entered into an IMF standby agreement. In the first year following the return of constitutional government, the situation improved considerably. In 1995 real GDP, supported by significant inflows of external aid, grew about 4.5 percent, and inflation declined from 43 to 17 percent. However, implementation of the economic reform program has since slowed significantly, largely due to a prolonged political crisis. In the past year, the administration has made considerable efforts to maintain macroeconomic stability despite the significant shortfall in external financing. The central government deficit was reduced to 0.5 percent of GDP, reflecting a stronger than expected tax collection effort, which reached 8.7 percent of GDP, and current expenditure controls. Net international reserves increased US$32 million. In the area of structural reforms, progress has been made in the restructuring of public enterprises, including the October 1997 privatization of the flour mill and the bidding of the cement plant in December 1997. Bank regulation and supervision continues to be enhanced. However, key legislation pertaining to tariff reform, the budget law, and civil service reform is still pending. Overall, the negative impact of the political crisis is increasingly being felt. Real GDP growth was 2.7 percent in 1996 and only 1.1 percent in 1997, and disbursements of international aid declined from US$610 million in 1995 to about US$390 million in 1997. Prospects for 1998 are more positive, with annual inflation expected to decline to less than 15 percent and GDP growth expected to 35 CARIBBEAN ECONOMIC OVER VIEW exceed population growth. However, much stronger economic performance is needed to make a dent in the country's widespread poverty. Policy issues 1. Institutional strengthening for poverty reduction. The key prerequisite for poverty reduction is economic growth. To achieve this, the restoration of political stability is critical to encourage, among other things, private investment. The strengthening of justice and security also plays a critical role. Within a very constrained budget, other important areas are the rehabilitation of infrastructure (for which significant external aid is still available) and the development and adoption of a strategy to increase the coverage and quality of education. Such a strategy needs to be based on a partnership between the state and the dominant nonpublic sector, which currently serves more than 70 percent of Haitian students. 2. Macroeconomic framework It is essential to avoid a deterioration of macroeconomic conditions in the midst of the political crisis. The authorities have developed an economic program that calls for a virtual balance in central govermment finances for the remainder of 1998 in an effort to hold the deficit at less than 1 percent of GDP. Implementation of this program is critical and is expected to receive support from the international community. It needs to be complemented by continued efforts to increase tax revenues and implement the initial steps of a civil service reform program. 3. Privatization. Public enterprises have become inoperative and a drain on public finances. The lack of strategic services such as electricity, telecommunications, and a functioning port system discourages new pnvate investment and job creation. Technical work for increased private sector participation in these areas is progressing, and it is important that momentum, at the very least, be maintained. 4. Environmental protection. Measures to protect the environment should receive high priority, especially in the area of deforestation. 36 Annex JAMAICA Population: 2.6 million (end-1997) GNP per capita: US$1,560 (1997 Atlas methodology) The economy The macroeconomic situation in Jamaican remains fragile. The economy contracted 2.4 percent in 1997 following a 1.8 percent contraction in 1996. The fiscal account deteriorated from a surplus of nearly 3 percent of GDP in 1995/96 to a deficit of 7 percent in 1997/98. The deterioration of the fiscal accounts reflects in large part the lag in revenues as a result of the economic slump as well as the cost of addressing financial sector problems. The government's tight monetary policy has succeeded in reducing inflation from 30 percent in fiscal 1995/96 to 8.8 percent in fiscal 1997/98. However, nominal and real interest rates remain high, and wage adjustments are over-shooting inflation in the absence of productivity gains. Although there has been some containment of the external debt (US$3.3 billion at end-December 1997), domestic debt has grown from J$60 billion at end-March 1996 to J$102 billion, or 46 percent of GDP, at end-March 1998. Lagging exports in the face of relatively strong growth in imports have resulted in further deterioration of the merchandise deficit and an increase in the external current account deficit from 3 percent of GDP in fiscal 1996/97 to 6 percent in fiscal 1997/98. Policy issues 1. Macroeconomic framework. There is need to rebalance fiscal and monetary policies with a greater emphasis on fiscal policy. This should involve shifting to a fiscal surplus in the near term to allow for a general lowering of interest rates as a precondition for increased investment and growth. 2. Financial sector restructuring. There is need to design and implement a program for consolidating the financial system including the speedy divestment of assets acquired by the government. This will help to minimize the holding cost of these assets as well as any contingent liability on the fiscal budget. 3. Medium-term framework for growth. In the medium term, an economic program should focus on (a) maintaining a consistent mix of fiscal, monetary, and competitive exchange rate policies to spur investments through a general reduction in interest rates, (b) increasing competitiveness through higher productivity and more flexibility in the labor market, (c) eliminating distortions, such as interest rate subsidies, (d) strengthening the core public sector through continued elimination or privatization of some services, such as 37 CARIBBEAN ECONOMIC OVERVIEW the marketing boards, and (e) reducing crime, violence, and tourist harassment. 4. Environmental protection. Environmental protection efforts need to be consolidated and deepened, especially to safeguard water resources, prevent land degradation, address waste management, and enforce effluent and emission standards. 38 Annex ST. KITTS AND NEVIS Population: 41,000 (mid-1997) GNP per capita: US$6,160 (1997 Atlas methodology) The economy St. Kitts and Nevis has benefited from good economic management, which allowed for annual rates of growth of 6 percent during the 1980-90 period. During the first half of the 1990s, however, real GDP growth declined to about 3- 4 percent a year, due in part to slower growth in tourism and the 1995 hurricanes, which reduced sugar production. GDP grew 5.8 percent in 1996 and 5 percent in 1997. Sources of growth include construction, finance, and utilities. The construction sector increased at an average rate of 6 percent, related mainly to public sector investment spending. During the period, significant investment in electricity and water led to an expansion in supply. In contrast, the major sectors earning foreign exchange recorded little growth. Agriculture recorded an average growth of 0.7 percent, influenced by reduced production of sugarcane. The performance of tourism was modest, reflected in an annual average growth rate of only 0.8 percent. Tourism was adversely affected by a number of factors, including damage caused by two hurricanes as well as insufficient airline capacity. Growth in the manufacturing sector was modest due to intense regional competition. Policy issues 1. Central government's finances. During the period 1992-96, the current account surpluses generated by government were generally low, averaging a mere 1.3 percent of GDP. Current revenue grew fairly rapidly, increasing at an average rate of 14.6 percent. However, current expenditure grew at an average rate of 15.2 percent, resulting in an increase from 22.8 of GDP in 1992 to 29.8 percent of GDP in 1996. As a result, the current account surplus stood at a mere US$0.1 million in 1996. The rapid growth of current expenditure reflects a general failure to control expenditure, especially wages and salaries, which accounted for about half of current expenditure during this period. 2. Level of domestic debt. The poor performance of public finances has reduced the ability of the government to provide counterpart financing for its capital program, necessitating heavy borrowing domestically at interest rates much higher than those of the external debt. The effective interest rates on domestic debt increased from 6.2 percent in 1992 to 8.7 percent in 1996, compared with 39 CARIBBEAN ECONOMIC OVERVIEW an average rate of 3.4 percent for the external debt. The increased interest burden has had implications for the governments s current expenditure. 3. Economic diversification. The economy of St. Kitts and Nevis is dependent on the sugar industry and tourism, and these two areas of activity account for 68 percent of total exports of goods and nonfactor services. The share of tourism in GDP has been constantly rising, while that of sugar has been falling, and to a large extent the economy is being transformed from dependence on sugar to dependence on tourism. The government has sought to encourage diversification- through its incentive framnework and its capital program, but much emphasis has been placed on the tourism sector. Other industries such as nonsugar agriculture and manufacturing have not thrived, and if significant strides are to be made in achieving diversity, great emphasis has to be placed on addressing the development of these industries. 40 Annex ST. LUCIA Population: 149,600 (mid-1997) GNP per capita: US$3,620 (1997 Atlas methodology) The economy After growing at 7 percent a year in the 1980s and 3 percent a year in the early 1990s, the economy grew at 3.8 percent in 1996 and 3.5 percent in 1997. During 1992-97, major sectors, such as agriculture, manufacturing, and construction, recorded negative growth. For example, between 1992 and 1997, agriculture contracted 6.1 percent a year, and its current share of the economy is only 8.6 percent. Only tourism is mitigating the negative growth of the major sectors. It is growing at 5 percent a year and contributes about 13 percent to GDP. It also provides about 72 percent of the total exports of goods and services. In an effort to stimulate the economy, current public sector expenditure growth outpaced current revenue growth, resulting in a decline in the current account surplus from 3.6 percent of GDP in 1996/97 to 3.4 percent of GDP in 1997/98. The total outstanding external debt is now 26.9 percent of GDP. Policy issues 1. Competitiveness. The govenmment is keen on making St. Lucia an internationally competitive, secure economy. Many infrastructural investments-for example, in roads and the Vieux Fort Airport-have already reduced the cost of doing business in St. Lucia. The World Bank-financed telecommunications project is expected to reduce the cost of telephone services. The Bank has also started to address labor productivity issues indirectly through a basic education project. However, trainability of the work force, as well as the loss of managerial productivity as a result of the continuous need to address this basic issue, is a key challenge for St. Lucia. 2. Public sector productivity. Another challenge is to improve public sector productivity. Government is currently considering privatization of some entities. Similarly, it has initiated some reform measures with the help of the Canadian International Development Agency and U.K. Department for International Development. The govermnent is in the process of defining a comprehensive program to address this issue. 3. Environmental management. Increasing reliance on tourism will require increased efforts to conserve the environment. The importance of land use management, including slope stabilization, river training, and disaster 41 CARIBBEAN ECONOMIC OVERVIEW prevention, are critical given frequent hurricanes. Investments in sewage facilities, waste management, water treatment, and coastal zone protection are being assigned high priority by the government. 42 Annex ST. VINCENT AND THIE GRENADINES Population: 112,400 (mid-1997) GNP per capita: US$2,500 (1997 Atlas methodology) The economy St. Vincent and the Grenadines achieved moderate growth of 4.1 percent a year over the six-year period 1990-95. The economy grew 3 percent in 1996 and 5 percent in 1997. It is well on its way to making the transition from an agricultural to a service-based economy. During 1992-96, the contribution to GDP of agriculture (and banana in particular) dwindled from 19.5 percent to about 11 percent. Even in tourism, St. Vincent and the Grenadines has been moving away from an excessive reliance on cruise passengers to a more balanced (and more upscale) clientele, which includes yachters and overnight tourists. During this period, the govemment showed fiscal surpluses of 3.7 percent of the GDP on average. The ratio of external debt (except for a disputed debt guarantee currently under negotiation between the government and a commercial bank) is about 32 percent of GDP. Policy issues 1. Change management. During the next three years, senior public officials will face an overwhelming number of tasks as they manage the economic restructuring. One option is to tackle only a limited number of these tasks identified as top priorities in a participatory national development planning exercise. Such a participatory process would include various sectoral public officials, private sector representatives, and leading nongovernmental organizations. It would require the commitment of a large number of people to succeed in bringing about the economic restructuring. 2. Fiscal management. The government plans to increase the consolidated public sector savings to 9 percent of GDP, while undertaking the economic restructuring. This would require considerable improvements in the efficiency of revenue collection, expenditure control, and divestments. A key government target is to limit personnel cost to less than 50 percent of recurrent expenditure. The Ministry of Finance's ability to develop the details in each of these areas and to monitor them effectively will determine the success of the medium-term economic program. 3. Human resource development and poverty reduction. Unemployment continues to be high in St. Vincent, which is also experiencing a shortage of technical and managerial personnel, particularly in the public sector. Major investments in training and education are needed. 43 CARIBBEAN ECONOMIC OVER VIEW 44 Annex SURINAME Population: 430,000 (1997) GNP per capita: US$1,200 (1997 Atlas methodology) The economy Suriname's economic performance deteriorated markedly in the 1980s due to a worsening of its terms of trade and failure to take corrective policy actions. Reserves dropped to low levels, and the government instituted trade and exchange restrictions as well as price controls, which led to large distortions in relative prices and a parallel foreign exchange market. Real GDP declined by a cumulative 19 percent from 1982 to 1994, and inflation averaged 72 percent annually. In the 1990s inflation accelerated, reaching almost 600 percent during 1994. After 1994 the country's economic performance improved dramatically, with real GDP increasing 5 percent in 1995 and the 12-month rate of inflation falling to around 37 percent. This outcome was the result of a major strengthening of public finances, the use of exchange rate as an anchor for financial policies following unification of the exchange rate in mid-1994, and tight credit policies that led to a sizable accumulation of reserves. Government revenues increased mainly because higher world prices for bauxite, higher export proceeds, and better tax administration generated a current account surplus. Since 1996, the country's economic performance has weakened, to around 3-5 percent, with the erosion of the budget surplus due to a 25 percent wage award and a deterioration in the balance of payments. Nevertheless, the maintenance of a stable exchange rate, combined with restraints on bank credit and high interest rates, further reduced the rate of inflation to less than 1 percent. Although the rate of growth of real GDP slowed between 1996 and 1997, there are signs that activity in the parallel economy has increased, particularly in activities concerned with gold mining. In fact, the existence of a sizable parallel economy complicates interpretation of the economic data and effective policymaking. Policy issues 1. Distorted business environment. The government needs to improve the business environment by removing (a) nontariff barriers, (b) trade licensing, (c) foreign exchange rationing for importers, (d) advance deposit requirements for exporters, and (e) nontransparent investment regulations. Government investment should also focus on improving infrastructure, such as roads, dikes, ferries, and the airport. At present, business comes to Surinane when it can carelessly extract natural resources or make monopolistic profits by selling to a captive market. 45 CARIBBEAN ECONOMIC OVERVIEW 2. Fiscal discipline. The government needs to consolidate the recent economic gains through continued fiscal discipline, which is expected to reduce inflation and maintain satisfactory external performance. The distribution and effectiveness of investment and recurrent spending need to be reviewed and improved. 3. Environmental protection. There has been a great deal of international concern regarding the logging of Suriname's forests. The government needs to establish an adequate framework for managing its natural resources before signing additional large logging concessions. International development and environment institutions have indicated their readiness to provide technical assistance in the area of natural resource management and to provide offsetting financial resources to discourage the signing of logging contracts that are not economically or environmentally sound. In addition, recent progress has been made on the eventual creation of a major protected wilderness area by various international environmental organizations. 4. Mining The government is seeking to review its mining policies and has requested technical assistance from the World Bank. Legal and institutional framework issues, as well as the tax regime and concessioning of mining rights, could be addressed. 46 Annex TRINIDAD AND TOBAGO Population: 1.3 million (mid-1997) GNP per capita: US$4,230 (1997 Atlas methodology) The economy Beginning in 1983, for more than a decade, the country faced falling oil prices, successive years of exchange rate depreciation, negative growth, high unemployment and underemployment, and a rescheduling arrangement with the Paris Club. Under an adjustmnent program, initiated in 1988, government expenditures were cut sharply, a market-based exchange rate regime was introduced, 50 percent of state-owned enterprises were divested, trade liberalization was deepened, and the oil tax regime was eased. Beginning in 1994, real GDP growth has averaged more than 3 percent a year despite declining petroleum prices, inflation has been low, and unemployment has been reduced from more than 17 percent in 1994 to about 13.5 percent in 1997. The economy has achieved internal and external balance, debt retirement is now exceeding new borrowing, and there has been a build-up of international reserves. Reaching a collective agreement with public sector employees has had a calming influence on other labor unions. The financial system is also being strengthened. However, the drop in oil prices in early 1998 is once again exerting pressure on the fiscal balance. The fundamental structural problems continue to revolve around the slow pace of economic diversification, with little or no linkages to the dominant petroleum and natural gas sectors, rigidities in the labor markets, and inadequate modernization and management of the economy. The petroleum sector is highly capital intensive and has been unable to generate adequate employment. Despite reforms, the public sector still accounts for 30 percent of employment compared with a combined employment of 20 percent in agriculture, mining, and manufacturing. Besides, poverty rates of about 30 percent (estimated by government) are associated with the high level of unemployment. Policy issues 1. Macroeconomic and incentive framework for growth. The country needs to continue with its sound macroeconomic management, including a tight fiscal policy, a competitive exchange rate policy, and an improved financial system in order to attract domestic and foreign private investment in the energy sector as well as in infrastructure, tourism, and export services. 47 CARIBBEAN ECONOMIC OVERVIEW 2. Roles of the public and private sectors. The government needs to accelerate the pace of public sector reform, including revisions in the compensation system, introduction of performance, and devolution of autonomy to key departments and local governments. Divestment or restructuring of several state-owned entities is crucial to improve their financial viability and efficiency in the delivery of services. 3. Unemployment and poverty. Sustained growth and development of nonoil sectors, in particular agriculture, light manufacturing, tourism, and business services, coupled with easing labor regulations, improving the quality of labor training, and improving the access and quality of education for all people are needed to further reduce unemployment and poverty. Well-targeted social programs complement this multipronged approach. 4. Environmental protection. Environmental management capacity needs to be strengthened to deal with the issues relating to oil and gas industrial pollution, solid and liquid waste management, flood control, and deforestation. 48