OPENING REMARKS DELIVERED BY HON. WINSTON JORDAN AT THE CARIBBEAN BREAKFAST MEETING WITH THE MANAGING DIRECTOR, IMF, WASHINGTON, DC, USA, SUNDAY, OCTOBER 9, 2016
Madame Christine Lagarde, Managing Director, IMF; Distinguished Governors, Delegates, Ladies and Gentlemen:
It is my distinct pleasure this morning, on behalf of the Caribbean Group, to give the opening remarks at this Caribbean Breakfast Meeting. After my first experience in Lima, Peru, last year, when I was asked to perform a similar task, I have come to consider these meetings to be extremely valuable to our region, as it provides an important, yet infrequent, opportunity for us to voice our concerns on matters affecting us at the highest level in the Fund. It is my fervent hope that this opportunity will be grasped on both sides in our quest to find appropriate workable solutions to our problems.
This year's meeting, in particular, is very timely as it occurs at a time when Caribbean economies are facing a number of challenges, challenges that are neither being grasped nor addressed in a timely and effective manner. Among the most pressing of these matters are the downturn in Caribbean economies, occasioned by external shocks; high and rising levels of public debt; correspondent banking relationships; and climate change and recurring weather-related challenges. The consequences of this failure to deal definitively with these issues are self evident: Our economies continue to be buffeted by strong headwinds and tossed by dangerous crosswinds; our people continue to suffer immensely while valuable resources and time are devoted to what we regard as sub optimal solutions.
Eight years after the Global Financial Crisis, in 2008, the slow pace of growth in the world economy has placed a strain on many Caribbean economies. Given our small and open nature, we remain vulnerable to the external forces in the world economy. For 2016, the IMF predicts that the world economy will grow by 3.1 percent, the same level achieved in 2015, with considerable downside risks. Slow world growth negatively affects our regions through two major channels: reduced tourism, and reduced demand for our commodity exports. Despite tourism-dependent Caribbean countries experiencing a steady inflow of tourists from the United States in 2014, with arrivals increasing through 2015, with growth in the United States expected to decline in 2016, these countries may face more challenges in the years ahead.
While low commodity prices, especially oil prices, have been favourable for tourism-dependent countries, commodity-based Caribbean countries such as Suriname and Trinidad and Tobago have been devastated by falling prices for their key exports, including oil. Trinidad and Tobago's economy has contracted each year since 2014 and this situation has continued into 2016, while growth in Suriname declined significantly in 2015 and is expected to be negative in 2016. In my homeland Guyana, as well as Belize, the end of the commodity boom years has put pressure on some of our traditional agricultural sectors, and resulted in lower export values. For both tourism-dependent economies and commodity exporters, lower growth has resulted in reduced tax revenues, causing a deterioration in the fiscal position of many Caribbean nations.
Commodity prices have shown some recovery in 2016. However, even as this occurred, the global economy experienced another shock—the United Kingdom’s vote to exit the European Union (“Brexit”). The results of the vote shook global financial markets: volatility spiked, and the British pound fell against major world currencies. Financial markets stabilized in the weeks following the vote, but economists believe Brexit could have longer-term negative impacts on growth of the British, and global, economy. To date, the impact of Brexit on the Caribbean has been muted. However, slower growth in the United Kingdom and Europe could have negative impacts on tourism and reduce demand for our exports.
To help Caribbean economies successfully navigate these external shocks, the IMF needs to provide more appropriate policy options and support; including support for expanding fiscal space to enable countercyclical policies, and developing more diversified economies through better business environments, enhancement of human capital, and greater economic integration within our region.
On the financial front, the latest challenge to the Caribbean is the withdrawal by international banks of correspondent banking relationships, a process known as “de-risking”. It comes at a time when, more than any other time, our financial system is deeply integrated with, or substantially connected to, those of other countries across the world through correspondent banking. While this trend has affected countries around the globe, the small economies of the Caribbean have been hit especially hard. In the first half of 2016 alone, at least sixteen banks, across five countries in the region, have lost all or some of their correspondent banking relationships.
Correspondent banking is the life blood of global commerce. Healthy correspondent banking relationships are essential because they facilitate trade, foster economic growth, create legitimate avenues for growing remittances and provide access to financial services. The adverse effects of de-risking on international trade, financial stability and growth, and money transfers and remittances have already been felt in many of our countries. If de-risking continues unchecked, all Caribbean states can expect to experience some level of macroeconomic instability, financial exclusion and, ultimately, economic collapse. The recommendations that have been posited, such as bundling of services, taking out insurance, and collectively approaching correspondent banks appear to be unrealistic.
The issue is further complicated by the fact that banks in the Caribbean do not have a long list of international banks with which they can form correspondent banking relationships. The progressive loss of correspondent banking relationships will increase, therefore, the already disproportionately high level of operational risk.
Over the last three years, the region has been addressing this issue not only through the implementation of FATF recommendations on AML/CFT, but, also, through numerous studies, reports and high level meetings with organizations such as the IMF, World Bank, United Nations and the Commonwealth Secretariat. In spite of numerous promises to address the problem, however, there has been virtually no progress to staunch the hemorrhaging by these banks. This non action, in light of the substantial work that has already been done, is worrisome. We, therefore, call upon the Fund to play a more realistic and proactive role in dealing with this phenomenon.
We applaud the efforts of the IMF and other multilateral institutions as well as Secretary of the Treasury of United States, Lew, whom we met a few days ago, for recognizing the importance of this issue to the Caribbean and the need to have it resolved. But it is to the IMF to whom we look to aggressively support Caribbean nations in taking a multi-faceted approach to fighting de-risking, consistent with the Financial Stability Board’s four-point plan. This plan includes a further examination of the issue, clarification of regulatory expectations, capacity-building jurisdictions where respondent banks are affected, and the strengthening of tools for correspondent banks to perform due diligence checks. Implementing this plan will require cooperation with both international banks and regulators in the United States, Europe, and other regions where international banks are domiciled. We must ensure that rather than being cut off from international banks, our local financial institutions and supervisors can learn from their best practices for AML/CFT risk management. The IMF can play a critical role by facilitating engagement and collaboration among international banking institutions, global supervisors, and the nations suffering from this wave of de-risking, by pressuring these institutions to take immediate action.
Ladies and Gentlemen, we cannot overlook the impact that climate change has been having on the economies and livelihood of the people of the Caribbean. Climate change is upon us and is wreaking havoc on vital sectors and infrastructure of the Caribbean, including fishing, tourism and agriculture sectors. Only a few days ago, Tropical Storm Matthew, with less than hurricane winds, wreaked havoc on the economy of St Lucia. A few days later, the tropical storm morphed into a hurricane, in the process leaving a trail of death and destruction to property and infrastructure in Haiti and The Bahamas. According to a recently released report by the United Nations Food and Agriculture Organization, climate change will lead to more frequent and severe drought in the Caribbean region which, in turn, will affect agriculture with the attendant risk of food shortages.
Extreme weather conditions, whether they vary from hurricanes to floods to droughts, will devastate the economies of the region, in the process threatening the livelihoods of millions of people. Frighteningly, a World Bank study has concluded that a one meter rise in the sea level could destroy sixty percent of the coastal wetlands in the Caribbean and the developing world. Many of our islands are threatened by rising sea levels. The increasing number and severity of extreme weather patterns and their changing weather cycles, with all that they entail for loss of lives and damage to property and infrastructure, can easily cripple small economies like ours.
Paradoxically, even though Caribbean nations have contributed very little to the release of harmful greenhouse gases that drive climate change, they are paying a heavy price for global inaction in reducing emissions. Scarce financial resources have had to be diverted to deal with this phenomenon, including building climate resilient infrastructure and encouraging the movement of people to highland and more secured areas. This has resulted in an increase in the financial debt burden that Caribbean countries can ill afford at this time. It is, therefore, imperative that there be provision of accessible climate finance at concessional rates, as well as greater use of market mechanisms to compensate low carbon emitters and economies most severely affected by climate change. Again, the Fund's leadership would be crucial to making this a reality.
While the Caribbean region has been grappling with these challenges, a health crisis broke out, with the emergence of the Zika virus in the region. The World Bank's estimates have indicated that this virus could cost US$3.5 billion to the Latin America and Caribbean region, or 0.06 percent of its GDP. For Caribbean economies such as Belize, Bahamas, Antigua and Barbuda and Barbados, the cost of Zika is estimated at over 1 percent of their GDP. As many Caribbean countries are already operating under constrained fiscal space, this health crisis could lead to further erosion of fiscal positions.
Presently, many Caribbean economies are aggressively pursuing policies to address these formidable challenges. However, if we are to build a strong and resilient regional economies, the IMF must play a stronger role as well. We welcome the IMF's views on additional steps that would enable the region to deal with its challenges, in the face of global uncertainty. We especially welcome solutions to dealing with the corresponding banking crisis which has recently blighted our region and has threatened our financial stability. We also welcome new solutions for promoting inclusive growth within our region, in order to end poverty. We look forward to a broader perspective on these and other issues, in order to build economies within the Caribbean region which are resilient to global shocks and can provide "the good life" for all of our people.
Thank you ladies and gentlemen!