By Krishna Srinivasan, Sònia Muñoz, and Varapat Chensavasdijai
As the COVID-19 pandemic continues to spread across the globe bringing severe human and economic costs the Caribbean is no exception. With over 1,000 confirmed cases, many countries have taken strong containment measures, such as border closures and lockdowns, to “flatten the curve.”
But the “sudden stop” in tourism is sharply slowing economic activity in the Caribbean, and growth in the region is projected to contract by 6.2 percent in 2020. This would be the deepest recession in more than half a century.
There are also possible spillovers to the financial system. For instance, lost output from firms and the high fiscal costs associated with managing local outbreaks given deficiencies in the region’s public health systems can potentially worsen the pandemic’s financial impact.
Further, the upcoming hurricane season poses additional risks to these already budget-strapped economies. To sustain the economy during the crisis and contribute to a faster recovery, countries will need to allocate resources to vulnerable groups affected by the pandemic.
Collapse of tourism
The Caribbean economies are being hit hard by the collapse of the tourism sector, which accounts for 50 to 90 percent of GDP and employment in some countries.
The global cruise line and air travel industries have ground to a halt with major cruise companies cancelling sailings through June and most airlines reducing or suspending service to the Caribbean region.
Key tourism source markets in North America and Europe are crippled by the pandemic. This, together with tight border controls and travel restrictions, has led to massive hotel booking cancellations and temporary resort closures—putting numerous people in the service sector out of work.
Experience from previous crises suggests that the recovery could be delayed. There is also a risk that the “fear factor” associated with the virus could have a long-lasting impact on tourism in the region, even after the pandemic recedes.
Economic fallout beyond tourism
The steep drop in commodity prices is affecting commodity exporters such as Guyana, Suriname, and Trinidad and Tobago through a loss in exports and fiscal revenues. Moreover, energy companies may cut back production plans in anticipation of weaker energy demand resulting from a contraction in global manufacturing activity. For oil-importing countries in the region, lower oil prices will provide a buffer to the shock.
Remittances average about seven percent of the Caribbean region’s output and exceed 15 percent of GDP in Haiti and Jamaica. With the United States, the United Kingdom, and Canada in deep recession, remittances flow to the region are expected to fall sharply.
Given the region’s high reliance on imported goods, supply chain disruptions could affect capital projects by constraining arrivals of materials and labor, as well as jeopardize food and health security by delaying the delivery of foodstuffs and medical equipment and supplies.
Foreign demand for the Citizenship-by-Investment programs, which have been an important revenue source for several Eastern Caribbean Currency Union (ECCU) countries, may decline sharply if investors lose confidence in the quality of healthcare systems in these countries. This would put further pressure on the fiscal accounts.
Caribbean countries have shown foresight in pursuing containment and mitigation measures, as well as adopting contingency and preparedness plans—from expanding hospital capacity and quarantine facilities, to procuring medical supplies and training medical staff. To ensure the virus is successfully contained, it will be vital to continue mass testing and contact tracing, while allocating adequate resources to hospitals and healthcare facilities.
However, most countries in the Caribbean have limited spending room in their budgets to cushion the economic impact of the pandemic. Likewise, few countries have flexible exchange rate regimes that would help boost their exports and output. Given this, directing resources within the available policy space toward individuals and businesses most affected by the pandemic will be critical to protect livelihoods and enable a recovery.
Most countries have already announced fiscal packages that include additional health spending; temporary cash transfers for displaced workers; credit support to small and medium-sized firms and affected sectors such as tourism, transport, and agriculture; expansion of social safety net programs for vulnerable groups (e.g., food and income support); reduction or deferral of some taxes and electricity tariffs; and tax and custom duty waivers on essential food and hygiene product imports.
Where feasible, central banks and regulators should play a complementary role to support economic activity. Central banks in the ECCU, Aruba, Barbados, Belize, Haiti, Jamaica, and Trinidad and Tobago have reduced policy rates and/or reserve requirements, or provided liquidity assistance through other facilities. Banks and other lending institutions have offered short-term payment deferrals and interest rate reductions on mortgages and loans and waived late fees and charges to eligible customers.
But further fiscal, monetary and credit-easing measures will likely be needed depending on the effectiveness of containment measures and how the demand for tourism recovers.
To safeguard financial stability, supervisors should intensify monitoring and increase the reporting frequency of financial institutions. For Caribbean countries an important consideration will be to identify financial sector risks, including exposures to tourism-related activities, and conduct stress testing.
Stepping up IMF support
The IMF is actively engaging Caribbean countries to offer policy advice and assistance , especially to those with pressing financing needs to cope with the pandemic.
As IMF managing director Georgieva recently outlined , the IMF is ready to deploy financial resources quickly. For instance, requests for the Rapid Credit Facility by Haiti, Dominica, Grenada, and Saint Lucia have already been approved, while emergency assistance for three additional Caribbean countries, including Jamaica, will be considered by the IMF’s Executive Board in the coming weeks. Barbados has also requested an augmentation of its existing Extended Fund Facility.
The doubling of the IMF’s emergency financing capacity means that up to US$2.5 billion could be made available immediately to the Caribbean region.
In addition, other recent reforms allow immediate debt service relief to low-income countries, such as Haiti, affected by the crisis, thereby creating space for spending on urgent health needs.
We are also working closely with the World Bank , Caribbean Development Bank, and other regional partners to explore innovative solutions and approaches to assist countries in the Caribbean navigate the challenges and pave the way to economic recovery.