…past economic policy failures also a factor
President of the Caribbean Development Bank, Dr Compton Bourne has said that while the global economic and financial crisis currently affecting the bank’s Borrowing Member Countries (BMC’s) is a consequence of severe external economic shocks, vulnerability to the crisis has been accentuated by past economic policy failures.
Addressing the opening of the bank’s Thirty Ninth Annual General Meeting in the Turks and Caicos Islands on May 27th Bourne said that these policy failures were revealed mostly in “the very high debt-to-GDP ratios with which some countries entered the current crisis.”
And according to the CDB President the weak fiscal position of the bank’s BMC’s severely limits their capacity to implement sufficiently large stimulus packages. In the circumstances, Bourne said that those countries had no option but to resort to multilateral development banks including the CDB, international financial institutions and the donor community.
Meanwhile, Bourne told the meeting that while much sought after tax concessions can serve to enable struggling private sector business enterprises to remain in operation and, in some circumstances, induce new capital investment, “doubts have been expressed in some quarters about the responsiveness of corporate investment to fiscal incentives in the Caribbean. Bourne said that an overall problem with what he described as the “tax relief approach” to providing economic stimulus is “the weak fiscal capacity of many developing countries in the hemisphere and the further erosion of fiscal revenue capacity that this strategy entails.”
Bourne said that directly addressing the problems of reduced access to finance and the higher cost of such access requires “a menu of options” including provision for interest rate reductions, special credit lines or financial windows at development institutions and expansion of trade credit facilities of central banks and specialist trade finance agencies.
And the CDB President said that if such stimulus packages as are put in place are to be effective, these may require, among other things, government loan guarantees to ease the concerns of private financial institutions that have become more risk-averse and are less willing to lend. “Similarly, a heightened aversion to risks in foreign direct investment might have to be attenuated by greater access to political risk insurance,” Bourne added.
According to Bourne state intervention may also be required to provide liquidity support and recapitalization in extreme financial crisis situations where financial institutions themselves have either collapsed or are in imminent danger of collapsing. ” In such instances the economic objectives to be pursued are avoidance of systemic risk to the financial sector and the associated contraction in the supply of private finance to enterprises and the personal sector,” Bourne added.
Meanwhile, the CDB President says that multilateral development banks should provide a flexible response to the crisis confronting developing countries, “predicating their decisions on recognition that the economic crisis in BMC’s is a consequence of severe external economic shocks. He said such flexibility “would call for a willingness to consider programme loans and policy-based loans which provide a great proportion of up-front budgetary support” as well as “partial relaxation of loan terms pertaining to counterpart obligations, terms of maturity, grace periods and interest rates.”
