The IMF’s Small State Large Stakes

The IMF after mixed results from combined commercial debt restructuring and official lending programs in St. Kitts and Nevis and Grenada presented policy guidance for small island state engagement in the Caribbean and Pacific with clear investor and government leader direction. It is intended for the forty members with populations from 200,000 to 1.5 million that recently gathered in regional conferences in the Bahamas and Vanuatu. They lack economies of scale and with narrow export and production bases show greater external shock tendency. Foreign ownership is high in most sectors and GDP growth lags behind other developing countries with more advanced infrastructure and technical capacity. Public debt levels are steep and Caribbean middle-income status excluded bilateral and multilateral cancellation. Financial systems are shallow and banks and non-banks often are too government-reliant which poses additional obstacles to strict oversight. Global capital market interaction is limited hampering liquidity and dollar exchange rate pegs dictate monetary policy and can hurt industry competitiveness. Growth and job creation have been slow due to private sector weakness and labor market rigidities, according to the paper. Migration and remittances act as lifelines particularly at times of natural disaster which can aggravate fiscal deficits in the absence of binding balance rules. Donor-supported catastrophe insurance is now available but has proved expensive and offers only “marginal” climate risk and energy-transport cost mitigation, the Fund believes. Regional trade and cooperation offer advantages but Pacific islands are too remote to benefit, and bond defaults should be avoided with workouts facilitated by collective action clauses. The East Caribbean common central bank and securities market could be a model for micro-states but has not prevented chronic over-borrowing and exchange rate pressure. In the past decade the Fund’s rapid response facility has been tapped twenty times for weather and geological emergencies, and structural reform conditions have not been priorities but are vital to medium-term recovery and sustainability. St. Kitts and Nevis completed a 2012 50 percent net present value reduction with full domestic and external creditor participation and interest and principal haircuts. New instruments were partially guaranteed by the Caribbean Development Bank and a special purpose vehicle backed by land was included. Tourism accounts for half of exports and depends mainly on US visitors, but the 50,000 inhabitants have diversified into other services and overseas markets. With VAT introduction debt-GDP should soon come down to 100 percent and sugar has been abandoned as uneconomical despite its historic importance.

Grenada on the other hand went off its Fund program a year ago after missing targets and insisting on further commercial bond concessions still in the process of negotiation. GDP growth was stagnant with a lingering primary fiscal gap and 40 percent of benchmarks “never achieved.”  Business climate changes remain elusive with local institutional and professional capacity constraints as Prime Minister Mitchell has been unconstrained in his criticism of bondholder behavior to raise the pain threshold.