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CDB commends Caribbean growth
in 2006, but notes some danger signs |
Caracas, Venezuela, May 30 - - The Caribbean Development
Bank (CDB) today reports favourably on economic performance
in the Region in 2006, cautions the leadership about the
risks inherent in depending too heavily on a single sector
or industry, an obvious reference to the difficulties
encountered by the traditional agricultural industries of
sugar and bananas, which in recent years have faced
increasing exclusion from old protected markets in Europe
because of new globalised trading arrangements.
The Bank’s assessment comes in two documents – Annual Report
2006 and Annual Economic Review 2006 – presented to the
two-day 37th Annual Meeting of the Board of Governors which
opened here today at the Radisson Plaza Eurobuilding under
the chairmanship of Venezuela. It is the second occasion
that this Spanish-speaking, non-borrowing member country was
hosting the Governors’ Meeting, having previously done so in
1986.
CDB says macroeconomic conditions were generally good in the
Borrowing Member Countries (BMCs), with expansion driven by
a continuing high level of external and domestic demand.
Main contributors to growth were tourism and construction.
There were, as well, encouraging performances by business
services and agriculture in a few of the countries.
Identifying the tourism sector among what it calls ‘areas of
risk’, CDB notes that while the industry had become the
major income, employment and growth driver, “many BMCs have
in effect substituted a past dependence on a single
industry, sugar or bananas, for a new one, tourism.
“The consequences of tourism dependence were evident in the
immediate aftermath of 9/11, and, more particularly, during
the months preceding the terrorist attack when the US
economy contracted and some Caribbean governments thought it
necessary to provide special assistance to the industry.
“Secondly, the industry is extremely sensitive to the
quality of environmental management, and it is not always
clear that environmental issues, and the associated disaster
management issues, are being given the attention that is
commensurate with the contribution of the industry to the
economic and social well-being of countries.
“Concerns related to the possible effects of global climate
change on the industry will also need to be explored.”
However, the Bank regards as perhaps even more critical, the
increasing signs of social instability, evident in the
steady rise in the incidence of violent crime across the
Caribbean.
This phenomenon is linked to what is described as an
increasing disaffection, particularly among male youth, with
education. It is also evident in decreasing levels of
tolerance and courtesy, and in increasing unwillingness to
seek excellence in work performance.
“While there is a clear link between innovation and
problem-solving, on the one hand, and freedom to explore and
to imagine, on the other, there is an increasing need for
institutional arrangements to stimulate and motivate
creativity in the Region, and to channel the resulting
social energies into pathways that are productive.”
Specifically on individual country performances, the Bank
reports that of the 17 BMCs, three economies expanded by
between 10% and 12%, one by 7%, and six by 4% to 5%, with
others showing slower growth. The only case of economic
decline in 2006 was Montserrat, still beset by difficulties
resulting from continuing volcanic activity there.
Referring to CDB’s operations during the year, the report
shows that US$128.6 mn was approved for the BMCs in new
loans, grants and equity contributions, as well as US$8.2 mn
as a loan guarantee to St. Kitts and Nevis.
Of the approvals, 62% went to the Less Developed Countries (LDCs),
27% to the More Developed Countries (MDCs), and 11% to
regional projects, including start-up financing for a
University of the West Indies (UWI) consultancy firm to
increase that institution’s contribution to business and
public sector operations.
The money approved is being channelled toward financial
sector modernisation, tourism and business infrastructure,
education and human resource development, electrical energy
supply, and national planning capacity. The Bank also
financed disaster risk reduction, and health, through
support for a feasibility study of a regional health
insurance mechanism.
Last year’s financing takes to US$2,747 mn CDB’s net
cumulative approvals since begining operations in 1970; and
53% of the total has been channeled to the LDCs, i.e.,
Belize and the countries of the Organisation of East
Caribbean States (OECS).
Borrowing costs to members are continually monitored and
moderated by the Bank, and the President, Dr. Compton
Bourne, O.E., in the Annual Report, provided the following
rationale for its strategy in 2006:
“Being very conscious of the fiscal pressures on its BMCs in
a situation of unsatisfied demand for development finance,
the Bank endeavoured to avoid any substantial increases in
its loan rates of interest despite the global trend towards
higher interest rates and a rise in the Bank’s own borrowing
costs. To this end, the Bank introduced a new Capital
Adequacy Framework for financial risk management and loan
pricing.”
In reviewing performances of the major income-generating
sectors, CDB notes that the contribution from tourism had
come despite only moderate rates of expansion in the number
of long-stay arrivals and a decline in the number of cruise
visitors, and was largely a reflection of increases in
visitor expenditure.
Construction sector activity was driven by a combination of
factors, including reconstruction from past hurricane
damage, investor expectations of continuing growth in
tourism, high domestic demand from prospective home-owners
and from the business sector, given a favourable medium-term
outlook and active credit marketing by financial
institutions, and by high levels of public sector
investment.
The increase in spending by the public sector in some
countries had been partly driven by the need to improve
facilities and infrastructure – particularly in relation to
transportation and competition sites for Cricket World Cup.
This performance, however, took place within the context of
generally higher prices owing to elevated oil prices, and in
some countries, supply disruptions in the provision of
agricultural commodities and higher tariff levels.
Reflecting continuing growth in economic activity from 2004
and 2005, unemployment rates generally declined, leading to
some wages pressure, particularly in the construction
sector, and to a continuing movement of labour to those
countries experiencing high rates of growth.
The rise in real sector activity was also reflected in an
improvement in government revenues, which, coupled with
efforts to improve tax administration and tax compliance,
offset higher spending on social and physical infrastructure
and on recurrent expenditures.
As a result, fiscal outturns improved noticeably in most
countries, although debt levels also increased in absolute
terms as overall fiscal deficits were generally in evidence,
and as countries borrowed to fund the capital programmes
which generated the deficits.
Despite a rise in financial system credit in most economies,
indications are that there was still substantial excess
liquidity in parts of the Region, as deposit growth remained
firm. Monetary authorities opted to raise interest rates as
part of the effort to contain the growth in credit and
relieve pressure on foreign reserves, and this was in step
with the continued slow upward movement in international
interest rates.
The current account of the balance of payments deteriorated
during the year as strong import demand, in line with the
expansion in economic activity, outpaced growth in travel
receipts; although a substantial portion of the expenditure
was financed by foreign inflows, leading to a rise in gross
reserves holdings across the Region.
Following are summaries of CDB’s assessment of performances
in key areas of the regional economy:
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Tourism
Strong growth in the main source markets, coupled with
domestic efforts to improve the attractiveness of
destinations, marketing, and air access, led to the
continuing growth in industry performance.
Increased visitor expenditure was an important element in
industry growth, since overall expansion in the number of
arrivals was relatively modest, and since cruise visitor
arrivals declined in many jurisdictions.
With respect to long-stay arrivals, available source market
data for BMCs suggest that while all markets performed well,
the US and the Canadian markets were exceptional. The
performance of the European market, excluding the UK, was
good; arrivals behaviour from the UK was mixed across the
Region.
Cruise tourism performance continued to be adversely
affected by a number of factors, including high fuel costs,
changes in cruise routes, and a dampening of the industry
segment’s performance during the year.
Agriculture
There was some improvement in agricultural sector
performance in 2006, largely reflecting favourable weather
following the adverse conditions of the previous two years.
In addition, there appeared to be greater public sector
involvement in 2006 through the implementation of projects
designed to improve competitiveness and agricultural support
services.
Enhancements to agricultural infrastructure through better
drainage and irrigation, and modernisation to existing
facilities, along with improvements in husbandry practices
and seed quality, also contributed to the improved
performance during the year.
The prospects for sugarcane, however, remained uncertain,
with traditional sugar production facing worsening export
price prospects as a result of import regime changes in
Europe.
Belize and Guyana both recorded increases in sugar cane
production while in Barbados output from the industry
contracted by 12.0%. The Region however continued with plans
to modernize the sugar industry with a movement away from
reliance on the production of raw sugar for export, to the
production of high value-added products (e.g. branded
products for direct consumption) and other derivatives
(e.g., ethanol and bio-fuel).
These changes are to a large extent triggered by amendments
to the EU sugar regime, implementation of which commenced in
July 2006 with a price cut of 5%. Implementation of these
reforms is expected to continue over the next three years
resulting in an overall price cut of 36%.
With regard to bananas, Windward Islands production
increased by 5.5%, and revenue of 7.4%. The trend is likely
to continue in 2007 as producers attempt to take advantage
of more stable prices by exporting bananas under the
Fairtrade label. This follows an announcement by a major
food retailer in the UK that its entire banana supplies will
be Fairtrade certified.
Challenges to the industry remain, due largely to the
implementation of reforms to the EU banana import regime,
the most recent of which occurred in January 2006, when the
EU eliminated the quota system which controlled the volume
of bananas imported from countries – mainly in Latin America
– enjoying Most Favoured Nation status.
The quota system has been replaced with a new import tariff
of 176 euro per tonne and a duty-free annual import quota of
775,000 tonnes for African, Caribbean and Pacific (ACP)
bananas. Thus, in addition to the traditional competition
from banana producers in Latin America, regional producers
will also be competing with producers from Cameroon.
Construction
Regional construction activity remained buoyant in 2006 as
public and private sector projects proceeded apace.
Preparations for the Cricket World Cup provided a
considerable part of the impetus for activity, although high
levels of activity could also be traced to residential
demand and to non-cricket-related business and tourism
demand.
Hotel, condominium and villa construction dominated activity
in the private sector, while, in the public sector, work
included, but was not restricted to, improvements to road
infrastructure, air and sea-ports enhancement, and
refurbishment of sports stadia.
Other public sector work included expanding the housing
stock, hospital services, flood mitigation activities, and
improving arrangements for the delivery of general
government services to the public. The sector experienced
difficulty from time to time during the year as a result of
cement supply inadequacies.
Manufacturing
There was some output growth in the manufacturing sector in
the region during the year, although the sector continued to
provide major contributions to output, employment and
incomes only in the major economies and in the larger
countries of the region.
The growth which occurred was fuelled by increased regional
and international demand, with domestic demand in some
countries being encouraged by “buy-local” campaigns, and by
other forms of public sector support.
In particular, there appeared to be some increased market
penetration in the US, particularly for petrochemicals,
electronic components, data services and high-end wooden
products.
Mining and Quarrying
Available data suggest that regional mineral production
turned in a mixed performance in 2006. In Guyana, sector
output continued to show the effects of the closure of a
large gold producer, consequent on the completion of ore
extraction from its main mining sites.
However, product declarations from small and medium sized
firms suggest an expansion in their operations, fuelled by
rising prices. The bauxite industry fared better, showing
signs of growth in both Jamaica and Guyana on account of
favourable international demand.
In Guyana this occurred at a slower pace than in 2005, as a
fall in prices led to the closure of a major producer of
calcined bauxite. This was partially offset, however, by
increases in the production of chemical grade and metal
grade bauxite as another major player entered the market.
Production of alumina in Jamaica, however, is likely to have
declined marginally.
In Trinidad and Tobago, the energy sector continued its
rapid expansion, spurred on by high oil prices and ongoing
exploration. Growth in this sector has been mainly
attributable to strong performances in the exploration and
production, refining and petrochemical sub-sectors. Small
quantities of oil were discovered in Belize, and production
for export to the US commenced during the year.
Offshore Business Services
Indications are that the regional international business and
financial services sector continued to build on past gains
and expanded further in 2006, as evidenced by a rise in the
number of licenses and an increase in registration fees.
While this would have reflected the favourable external
environment, efforts at the local level to enhance the
attractiveness of the jurisdictions also contributed to the
overall outturn.
During the year, work continued on improvements to the
Region’s legislative regime with the passage of new
legislation and refinements to its regulatory structure.
There was also some evidence of product diversification and
consolidation in the sector, with the establishment of new
mechanisms such as the Specific Mandate Alternative
Regulatory Test (SMART funds) – a flexible investment
vehicle that allows innovative structuring of investment
funds - in the Bahamas, and mergers particularly in the
areas of banking and trust companies, which offered new
scope to realise operational efficiencies.
Conclusion
CDB believes that the improved competitiveness and
production flexibility that is sought for the major sectors
and other industries of Caribbean economies will be achieved
through the industry restructuring that is a critical part
of the economic transformation to be attained through the
two currently ongoing regional integration processes, one
affecting the OECS sub-region, the other affecting the wider
CARICOM region.
“Significant effort will be required to ensure that the
benefits in fact flow from integration; and a great deal of
care will be required from the OECS countries and from the
wider CARICOM grouping to ensure that the two sets of
initiatives do not develop into areas of conflict for each
other.
“Focused attention to fiscal and debt management will be
critical, particularly given the economic and social
adjustments that will need to be made, and at a faster pace
than that to which we have traditionally been accustomed.
“Regional decision-makers, however, are well aware of the
issues, and it is the expectation that the opportunity
provided by the current level of economic performance will
be seized, and that the appropriate decisions will be taken
and expeditiously implemented.”
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